What’s Hammering?
Hammering refers to the quick and concentrated sale of stock shares in response to an unanticipated incident that severely impacts the company’s short-term performance. Hammering causes a sharp stock price decline.
How Hammering Works
Knowing an Asteroid Event
Hammering is a typical response to unexpected events, such as a terrorist assault. It may target one stock, a sector, or the whole stock market.
For personal gain, investors may work together to reduce share prices. Hammering requires a few large or modest sales orders.
Hammering may result from an asteroid hitting one corporation. A lousy incident can rapidly transform a company’s outlook if its success depends on a CEO or a product.
Some businesses are especially vulnerable to asteroid strikes. For a small pharmaceutical or biotechnology business, a clinical trial or FDA approval setback might overnight transform its short-term earnings forecasts.
Typical asteroid events include business restructurings, mergers, acquisitions, bankruptcies, spin-offs, and takeovers. If the market is surprised, the stock may plummet.
Investors may try to profit from an asteroid occurrence if they see a stock misprice. They buy the stock once it falls, expecting a speedy recovery.
That strategy may fail. Analysts may drop price targets and recommend the stock after an asteroid incident. Other investors will follow such advice, keeping the stock price low for a long time.
Asteroid occurrences can boost stock prices. When a hostile takeover happens, the target company’s stock price may increase. If the takeover fails, the stock price may grow or fall based on market reaction.
Making a Hammer Candlestick Chart Pattern
Technical analysts detect a hammer candlestick pattern, indicating a stock’s price rebound.
A lengthy stock price downturn may trigger this sign. Strong stock sales continue. It hits a low point before recovering. It finishes near or above its prior mark.
The market may be “hammering out a bottom.”
According to technical experts, hammer candlestick patterns signal that a stock should reverse course and increase.
Stock Hammering Example
Chipotle Mexican Grill, Inc. (CMG) shares fell after 22 individuals were ill after dining at its restaurants in October 2015. The culprit was E. coli.
Chipotle responded rapidly to early reports. It closed 43 Washington and Oregon sites briefly before food testing verified the problem.
The terrible news persisted. One of two Chipotle-linked E. coli variants had affected 55 individuals in 11 states by late January 2016.
From October 2015 to February 2018, shares dropped from $750 to $250.To every company’s dread, Chipotle Mexican Grill became the subject of late-night food poisoning jokes.
But there was more. The FDA commended the corporation for taking vital crisis management steps, including closing 43 West Coast outlets. In addition, Chipotle:
- Ran 2,500 microbiological tests on food, restaurant surfaces, and equipment. Not one had E. coli.
- Expanded product testing before restaurant replenishment;
- Deep-cleaned all eateries and
- Collaborated with government agencies to review food safety regulations.
Chipotle stock didn’t recover until late 2019. By mid-2020, its share price was about $1,200. Chipotle did accomplish the hammer candlestick pattern, but not as swiftly as investors wanted.
Conclusion
- Hammering is a rapid sell-off in a stock, sector, or market.
- It follows an unexpected, unfavorable occurrence or asteroid event.
- Hammering occurs more often in specific equities and industries.
