Capitulation

Capitulation is a term that means surrender. As such it is a military term were one side gives up to another. In fact, the root of the word is “head” and in this context refers to the heading of an agreement for surrender. When applied to markets it generally refers to the end of a downtrend where the bulls give up and sell. It is in fact the best time to buy. It is accompanied by high volume as everyone is rushing to the exit at the same time and high volatility. This can be seen by a spike in volume and in the volatility index. Notice in the charts below how in the middle of July when the market reached a bottom the charts for volume is at a high and the chart for volatility is also at a high. Click on charts to enlarge.
NYSE TOTAL VOLUME

VOLATILITY INDEX

SPY daily chart

As can be seen from price action of the SPY daily chart above the market has entered a new downturn. Will the Fed bailout of Fannie and Freddie save the market? It may give a bounce but we will just have to wait and see if it brings capitulation.