What does capitulation in a market context refer to?

Capitulation in a market context refers to extreme selling pressure, typically occurring when investors surrender to bearish sentiment and sell their holdings, often at a loss. This phenomenon is characterized by a significant increase in trading volume as investors exhaust their willingness to hold onto depreciating assets. Capitulation signals a point in the market where fear and panic dominate trader sentiment, usually leading to a sharp decline in prices.

The selling that constitutes capitulation tends to occur at a point of maximum distress, which can sometimes precede a market bottom. It indicates that the market may have exhausted potential selling, making it a critical juncture for potential reversals. This drastic selling often captures a shift in market psychology, moving from fear to potential recovery. Understanding capitulation is essential for technicians, as it can provide insights into future price movements and market sentiment shifts.