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Capitulation

HK and Chinese futures indices capitulated on the down side last night in what seemed like panic selling, heading into after-hours trading in global markets. The futures contract for HK43 (HSI) closed at 24,330 while the HK China H-shares futures index closed at 11,400. This represents discounts of almost 2.5% and 3% respectively to their overnight closes here in Asia, signaling that we may see more pain at the open this morning. The behavior of the HK/Chinese futures contracts here is classic capitulation stage action, which happens when a ‘bubble bursts’! During this stage, most traders and investors signal their loss of ‘hope’ in their positions, deciding to bite the bullet, dumping everything. The act of buying here has often been described as ‘catching a falling knife’. Ironically though, when a market capitulates in such a fashion, it also signals that the sell down is bottoming and the overdone nature of the plunge could set things up for a rebound – technical or otherwise. Nimble traders have often found great reward trading such opportunities! Caveat emptor!
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