Capitulation on the Downside

Capitulation on the downside is a capitulation of the longs who bought stock, only to find that instead of going up, the stock is going down. They buy more as the price drops with the intention of averaging down, but this action only digs them deeper into the hole.

As the stock starts to bottom, the capitulation occurs and traders who are long panic and sell. They feel it is the end of the world and that the stock is going to zero. They want out at any cost. They can’t tolerate the discomfort and race to get out of losing positions. This massive sell-off kills the price of the stock, but at this point the traders no longer care about the price. At the low, a big buyer usually appears and takes out all these panicky sellers of stock. Which pushes the stock price up again. At the bottom, as sellers get out of their positions and eventually disappear, the selling dissipates, and the stock has nowhere to go but up.