Stock Of The Day: Did PayPal Sellers Capitulate?

Shares of PayPal Holdings, Inc. (NASDAQ:PYPL) are trading sideways on Wednesday. On Tuesday, they dropped by more than 20% after the company posted its earnings. That’s why PayPal is our Stock of the Day.

Two historical things took place yesterday, and they may end up leading to a buying opportunity for some traders.

The first thing to consider is that yesterday's volume was the highest ever in a single day for PayPal. 141 million shares traded. On a typical day, the volume is about 20 million.

This could signal a capitulation on the part of the sellers, and this could end up being a bullish dynamic.

Capitulations occur when investors and traders who wish to sell become frustrated because the price is falling. Their plan is to wait for the stock to rally or bounce so they can sell their shares at a higher price.

But that rebound or bounce never happens. The price just keeps drifting lower and lower.

These sellers eventually become so frustrated that they ‘throw in the towel'. They decide to bail out and sell their shares regardless of the price. As a result, an extremely large amount of volume trades.

This could set the stage for a move higher.

If, after a few days, other investors and traders think the selling was an overreaction to the news, they may decide to buy. But when they come into the market, they might have a hard time finding sellers.

The sellers have left the market.

This means that those who wish to buy will be forced to pay premiums and outbid other buyers to draw the sellers back in. This would force the price higher.

PayPal is also the most oversold that it has ever been. This could bring buyers into the market, and they could force the price up. Many trading strategies are based on reversion to the mean and anticipate a reversal or a move higher.

A potential capitulation by sellers and extreme oversold conditions could result in a reversal and rally for PayPal.

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