Glossary
Capitulation
A burst of panic selling, often on very high volume, as holders give up; it sometimes marks the late stage of a decline.
On this page
Capitulation is the point in a decline when large numbers of investors give up and sell at almost any price, usually after a long or sharp fall. Selling becomes emotional rather than analytical, volume surges and prices drop quickly. Traders watch for it because, once the most fearful holders have sold, there may be few sellers left, and some important market bottoms have formed during or just after capitulation.
What it looks like
There is no formula, but capitulation days tend to share features:
- Extreme volume, often two or three times normal or more.
- Very broad declines, with nearly every stock in an index falling.
- Volatility spikes. The VIX, a gauge of expected S&P 500 volatility, jumps to unusually high levels.
- Intraday reversals. Price may plunge early and recover part of the loss by the close, leaving a long lower shadow on the daily candle.
Why it is hard to use
Capitulation is easy to identify after a rebound and very hard to identify while it is happening. Many days that look like a final washout are followed by further declines; in 2008 there were several apparent capitulation days months before the March 2009 low. Treating a single heavy-volume down day as a buy signal has often been costly.
The concept is more useful as a description of crowd psychology: the most intense fear usually comes late in a decline, when prices already reflect a great deal of bad news.