What is Hammering?
Hammering is the rapid and concentrated selling of stocks in response to an unexpected event that is seen as highly detrimental to a company’s short-term performance. This often results in a steep decline in the stock’s price.
Key Takeaways
- Hammering is characterized by a swift and intense sell-off in stocks, sectors, or the market as a whole.
- Typically follows an unanticipated negative event, known as an asteroid event.
- Certain stocks and sectors are especially vulnerable to hammering.
How Hammering Works
Understanding an Asteroid Event
Hammering usually occurs in reaction to unforeseen bad news, labeled as an asteroid event, which can impact a single stock, a market sector, or the entire market. In some cases, investors might collaborate to drive the share price lower for their benefit. Hammering can be driven by large block sale orders or numerous small sell orders.
A single company may experience an asteroid event that leads to hammering. If a company’s success heavily relies on a specific leader or product, an adverse event can quickly change the company’s outlook.
Some industries are especially prone to asteroid events. For instance, a small pharmaceutical company facing a setback in clinical trials or FDA approval may see its stock plummet overnight.
More common asteroid events include corporate restructurings, mergers and acquisitions, bankruptcy filings, spin-offs, or takeovers. Unexpected occurrences of these events can trigger hammering of stocks.
Investors might attempt to capitalize on an asteroid event, believing it has temporarily mispriced the stock, by buying shares in hopes they will rebound. However, this strategy can backfire if analysts issue downgraded recommendations and lower price targets, keeping the stock priced lower longer.
Interestingly, not all asteroid events are negative for a stock’s price. For example, a hostile takeover can increase the target company’s stock price. Conversely, if the takeover fails, the stock price could vary based on market sentiment.
Achieving a Hammer Candlestick Chart Pattern
Technical analysts identify patterns in stock price movements, such as the hammer candlestick pattern, signaling a potential price recovery. This pattern emerges after a prolonged downtrend, where the stock experiences heavy selling, reaches a low, and then begins to rebound, eventually closing near or above the previous mark.
In this case, the market is said to be
Related Terms: stock market crash, stock price drop, market sell-off, technical analysis patterns.
References
- MarketWatch. “Chipotle and the E. Coli Outbreak: What You Need to Know”.
- Chipotle. “Historical Stock Price”.
- Thrillist. “Jimmy Fallon Hilariously Lists the Pros & Cons of a Chipotle Burger Chain”.
- FDA. “FDA Investigates Multistate Outbreak of E.Coli 026 Infections Linked to Chipotle Mexican Grill Restaurants”.
