What is 'Hammering'

Hammering is rapid and concentrated selling by speculators of a stock perceived to be overvalued.

BREAKING DOWN 'Hammering'

Hammering the market is due to large sale orders or many small sell orders. In some cases, investors may collaborate on orders in an effort to push the share price lower. Hammering the market usually occurs upon unexpected bad news, also known as an asteroid event, such as a terrorist attack.

Hammering may result from an asteroid event. Asteroid events are a type of event risk that find companies unprepared. For example, if a public company relies on a particular executive or board member, or the sales of one or a few products, then a sudden departure or market disruption could reduce sales and the stock price. Asteroid events may occur in small pharmaceutical or biotechnology companies dependent on clinical trial success, FDA approval, and product sales of a single drug. Other potential asteroid events are restructurings, mergers and acquisitions, bankruptcy, spin-offs or takeovers.

Institutional investors may try to benefit from an asteroid event if they perceive it as a temporary stock mispricing. Such a strategy leverages the tendency of a stock price to decrease due to a sudden or dramatic change. Stock analysts review factors such as the regulatory environment and possible synergies or advantages of the changes, then set a new price target for the stock. An investment decision would then be made based on the current stock price and the price objective. A correct call could lead to profitable trading; an incorrect call could generate losses.

For example, when an asteroid event such as a hostile takeover occurs, the stock price of the company is likely to fall. Research analysts aim to project whether the takeover will occur, and its effects and their duration as well as implications for earnings and the stock price. If the takeover fails, the stock price could rise or fall depending on market sentiment. Analysts could estimate a stock price range or select a single price target for each. Investors would buy or sell shares of the target company depending on their outlook on the transaction and the stock price.

Hammer Candlestick Chart Pattern Explained

In technical analysis, a hammer candlestick pattern is an indicator that can appear after a prolonged downtrend in a stock price. During the period of the hammer candlestick, a stock or index undergoes strong selling. It later recovers and closes near the unchanged mark or higher. In this case the market may be seen as hammering out a bottom. When combined with moving averages and indicators, such patterns can warn of important trend reversals.

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