The term “capitulation” in finance refers to a sudden burst of selling pressure in a market or security while its’ decline and indicates a mass surrender of investors. A sharp exchange price drop results in the breakdown of the decline as those who did not sell their shares during the rapid price decrease are unlikely to do so soon afterwards.
Capitulation can occur even in case of investors being bullish. During the downturn with the growing number of investors selling their assets in order to avoid losses, the price drops. In these circumstances traders that have not suffered from losses or are not afraid of them start to actively purchase securities at the lower price.
Investors are concentrating to find the sign of capitulation. It is the price rebound that leads after the stop of panik assets sell.
As stated above, the capitulation is a particular time point of price being on the lowest level before the rebound because of the mass shares surrender.
Even though the definition of capitulation assumes the price growth after its’ drop, it doesn't mean the following decline later. The bear part of the market can be described with repetitious price plunges and premature capitulation calls, anyways, the capitulation can be recognized after the rebound.
Technical analysis in identification of Capitulation
Capitulations are known for significant price changes of assets and financial instruments. Candlestick charts are typically used for identification of specific patterns of capitulation. One of the patterns is the hammer candle, which signals the price fall below the opening level but also means recover most of the price losses by the end of trade.
Contrarily, a shooting star candle which describes a session in which the price at first rises sharply but closes by the opening level.