Capitulation Can Bring Opportunity – Case Study: Smith Micro Software

• Posted by Greg Harmon
• on February 10th, 2011

I find it fascinating when concepts that you read about in books can be found in the market.  Not surprising but interesting and illustrative and a lot more useful when you live through it.  This was the case yesterday when Smith Micro Software announced earnings in the pre-market hours.  Prior to that report I was following it as a potential long set up from research I had done on the weekend, so it was on my radar.  This what I wrote Sunday.

Smith Micro, SMSI,  has been basing after its long fall from 17, with the range now shrinking to the upside. The MACD is crossing higher and the RSI has been lifting off the turf. Over 13.23 look for this to continue higher to resistance at 13.50 and then 15 if it gets through. A stop could be placed at 13.

It did briefly trigger on Monday but could not hold so I did not get in. Thank goodness for that. Take notice of the bottoming area near 8 from August and September above. When they reported earnings Wednesday morning traders were none too pleased and the stock began falling immediately on heavy volume to that level. What looked like a great setup a day earlier now had holders knocking each other over to get out as soon as possible. Nearly 150% of the average daily volume had traded before the market had opened. It was smelling like capitulation. Below is the definition of Capitulation from Investopedia.

When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.

Look at the chart below showing a close up of the last 3 months and in particular Wednesday’s action.

There are a few things worth noting on this chart. First look at the volume bar. SMSI traded more than 15 times the normal volume. Panic. Capitulation. Next, the bottom of Wednesday’s candle was near that August to September bottoming process noted above and it was a hollow red candle, meaning that the intraday price action was positive, closing above the open. You can also see that the first part of Thursday continued that positive move. Now look at the detail below on the 5 minute chart.

This chart clearly shows that price action was positive right from the first 5 minutes! Also notice that the RSI had a steady climb higher all day and the MACD peaked out lower within 15 minutes. This was an Opportunity. The market does not give this kind of insight often. Study these charts on all the timeframes. Memorize the price action. What made it look like an opportunity. Do this and you will be ready for the next time.

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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