A hammer candlestick is one in which the open and close are close to one another (indicated by a short thick), the top shadow is short, and the bottom shadow is very long, indicating that a stock traded very low during much of the period in question before rallying and closing very close to (above or below) its open price. One way traders attempt to do this is by analyzing a stock’s candlestick chart to see if they can identify a “hammer candlestick” following a period of decline.Įach candlestick on a candlestick chart shows a stock’s open, close, high, and low prices over a particular period.
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How to Spot Capitulation in a StockĬapitulation is much easier to identify in hindsight than in real-time, but investors who want to buy in at a stock’s bottom often try to identify the end of a period of capitulation so they can buy a stock just before it rebounds. When it comes to a particular stock rather than the market at large, capitulation can occur as a result of disappointing news (e.g., dropping sales or missed earnings estimates) being released during an existing period of decline, assuming the stock’s resulting price drop is substantial enough to frighten a significant number of investors into selling. The onset of the COVID-19 pandemic in early 2020 also set off a cascade of capitulation, although it was less serious and shorter-lived than the selloff of the late 2000s. The bursting of the housing bubble and subsequent banking crisis in 2008 led to market-wide panic selling that turned into a serious recession. Market-wide capitulation can sometimes happen in response to a particular macroeconomic event. If most stocks have been in a gradual decline, then sharper declines begin to occur, investors may begin to sell off their stocks and move their remaining money into more stable investment vehicles like preferred stock, precious metals, corporate bonds, or government bonds. This most often occurs during bear markets and corrections when most of the market begins to lose value.
Market capitulation occurs when panic selling becomes a market-wide phenomenon that affects most stocks.
However, identifying the “end” of a period of capitulation is hard to do until it has already happened. This is based on the assumption that all of those who were going to sell have sold, so only buyers remain, and they will push the stock's price up. Once all of a stock’s panic sellers have capitulated (i.e., when the stock’s price stops falling sharply and begins to stabilize), investors who are still bullish on the stock may think it has hit a new bottom and may see this as a buying opportunity, hoping the stock will rebound and begin to appreciate.
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