Given that most stock markets are at or near all-time highs, I thought this might be a good time to talk about the market capitulation and why you should be aware of this phenomenon. It is important to understand that it takes considerable experience to properly identify and trade capitulation that can occur at all-time highs or solid resistance that cannot be broken. A simple definition of capitulation is when long positions are abandoned and a period of high volume sales occurs when traders experience panic and are eager to exit their positions to avoid losses or realized gains. A simpler explanation would include the term panic selling.

One way to identify capitulation, as opposed to a normal corrective move to the downside, is to look at the volume with scrutiny. The capitulation gathers momentum as panic selling takes over the mindset of confused merchants. The volume will increase and the momentum of panic sales increases as the fear level increases. I think it is important to mention the word fear. Capitulation is directly correlated to fear, and that fear can continue for quite some time as scared investors abandon their positions.

Volume is key to identifying this market movement and you will see much higher than normal volume levels. Sure, the volume levels can be absolutely massive. Newer traders, especially those who started after the 2007-2009 market crash, will see such huge volume numbers relative to the volume levels they have been trading for the last 7 years.

I can vividly remember the market crash of 1987. Although I had been trading for several years, my experience was with a rapidly uptrend market. We thought the sky was the limit and we had no experience with a serious move down. I can also recall the speed and breadth of the liquidation. I had never seen volume numbers hit the levels that the rapid downward movement was creating. Frankly, it was terrifying. He had the typical mentality of a novice trader. During my early years I thought the market was heading to the moon. As the move down gained momentum, he was confident that the stock market was going to hit zero.

In 1987, most of the liquidation was attributed to program trading, and the NYSE and other exchanges have taken steps to control the influence of these programs. These measures are known as circuit breakers and companies are forced to cancel their trading program in the hope that the market will normalize the movement. Having experienced various capitulation moves, my general opinion is that circuit breakers scare traders even more.

I suspect that we will see a capitulation at some point in the future as this market peaks and the bullish momentum begins to deteriorate. If you can correctly identify one of these moves, you can make a lot of money by going short. As always, best of luck in your negotiation.