Loading the player...

What is 'Capitulation'

Capitulation is when investors give up any previous gains in stock prices by selling equities, to get out of the market. Capitulation involves extremely high volume and sharp declines. It also usually involves panic selling. The term is a derived from a military term which refers to surrender.

BREAKING DOWN 'Capitulation'

After capitulation selling, many traders think there are bargain buying opportunities. The belief is that everyone who wants to sell a stock for any reason, including forced selling due to margin calls, has already sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that capitulation is the sign of a bottom.

Investors can only identify capitulations after they have occurred. While traders often attempt to anticipate capitulation selling or buying, the reality is that capitulations are outcomes that result from the maximum psychological and financial pain that can be endured by investors before liquidating their positions. (To learn more, see: Profiting From Panic Selling.)

Using Technical Analysis to Identify Capitulations

Capitulations often signal major turning points in the price action of underlying securities and financial instruments. Technical analysts can visually identify capitulation using candlestick charts. Hammer candles often form at the end of a selling frenzy when the lowest price is made, as capitulation sets in and signals a price bottom followed by a reversal bounce on heavy volume. Traders who wanted to sell their positions have done so as panic reached a climax. As fear starts to subside, greed may set in and reverse prices.

Image depicting an example of a reversal after capitulation selling.

Conversely, a shooting star candle often forms at the end of a buying frenzy, when prices reach their high, indicating a top is in place. Traders who wanted to buy a position have done so, and the fear of missing out has reached an extreme. The greed of attaining a position at any cost starts to subside when prices fall rapidly. When the last group of buyers sees their positions declining, fear starts to creep into the market. As prices continue to fall, buyers who purchased earlier start to sell their positions to salvage remaining profits or limit losses. (For further reading, see: Market Reversals and How to Spot Them.)  

The extent of capitulation can be measured on different charting time frames as small as a one-minute chart, or as large as a monthly chart. Larger timeframes typically produce more reliable capitulation signals as they allow participants to engage and determine the outcome of price action.

RELATED TERMS
  1. Hammer

    A Hammer is a price pattern in candlestick charting that occurs ...
  2. Panic Selling

    Panic selling refers to wide-scale selling of an investment, ...
  3. Shooting Star

    A shooting star is a bearish candle with a long upper shadow, ...
  4. Three Stars in the South

    The three stars in the south is a three-candle bullish reversal ...
  5. Panic Buying

    Panic buying is a type of behavior marked by a rapid increase ...
  6. Climax

    A climax is a market condition that is characterized by escalated ...
Related Articles
  1. Investing

    Snap Could Rebound 30%: Bear Traps Report

    While Snap continues to reach new lows, one analyst says there's an "extremely high probability" of a turnaround
  2. Investing

    War's Influence On Wall Street

    Blitzkrieg? Dawn raids? Sounds like the markets and the battlefield have a few things in common.
  3. Investing

    Market Timing Tips Every Investor Should Know

    Market timing rules benefit investments by finding the best prices and times to take exposure and book profits. Use these tips to protect your portfolio.
  4. Trading

    An Option Strategy for Trading Market Bottoms

    A reverse calendar spread offers a low-risk trading setup with profit potential in both directions.
  5. Investing

    A Stock Sell-Off Vocabulary Guide

    When stocks sell-off, a whole bunch of new financial terms start popping up. Here's our cheat sheet.
  6. Investing

    Tesla’s Shorts Throw in the Towel

    Short sellers who doubted Tesla got trounced after the auto maker's 2Q results beat estimates.
  7. Trading

    These Commodities Are Trading Near Major Levels of Support (DBC, COW)

    Bullish long-term chart patterns on these key commodity-related ETFs suggest that prices are headed higher over the months ahead.
  8. Trading

    Will Shake Shack Shake Its Bearish Trend?

    We look at Shake Shack's troubled performance and whether a breakout may be in the cards.
  9. Trading

    Walmart Sellers in Control After Earnings Miss

    Walmart stock is selling off after a poorly received fourth quarter earnings report and may be headed for the low $80s.
  10. Investing

    Bitcoin Investors Face More Pain On Likely 35% Plunge

    Bitcoin's price decline may steepen, technical charts show
RELATED FAQS
  1. How are Shooting Star patterns interpret by analysts and traders?

    Learn what the shooting star candlestick formation is and the reasons traders and market analysts commonly interpret it as ... Read Answer >>
  2. What Do You Call a Candlestick With No Shadows?

    A candlestick with no shadow is seen as a strong signal of conviction by either buyers or sellers. Read Answer >>
  3. What are the differences between a bar chart and candle sticks?

    Explore the difference between bar and candlestick charts. Learn how technical analysts use charts in the analysis of supply ... Read Answer >>
  4. What are the main differences between a Doji and a Spinning Top pattern?

    Identify the differences between doji candles and spinning tops on a candlestick chart, and learn how traders look at each ... Read Answer >>
  5. What does the three black crows pattern mean?

    Learn the basics of the three black crows pattern and how analysts and traders interpret this bearish reversal pattern when ... Read Answer >>
Trading Center