What Is a Spike?
A spike is a comparatively large upward or downward movement of a price in a short period of time. A good example of a negative spike in the financial markets is the infamous stock market crash of Oct. 19, 1987, when the Dow Jones Industrial Average (DJIA) plunged 22% in a single day.
A spike may also refer less commonly to the trade confirmation slip which shows all the pertinent data for a trade, such as the stock symbol, price, type and trading account information.
- A spike is a sudden and large price move—either up or down—in the price of an asset.
- Technical analysts use the occurrence of spikes to help make trading decisions. For instance, if the spike was accompanied by increasing or decreasing volume.
- Spikes can occur when new information quickly enters the market, such as an earnings surprise or SEC investigation.
There are less drastic examples of spikes, which are seen when investors react to unexpected news or events, such as better-than-expected earnings results. Use of the word "spike" originates from the antiquated practice of placing paper trade order slips on a metal spike upon completion.
The concept of a spike in a stock’s price is used in technical stock analysis. Technical analysis is the study of trends in stock price changes and in trading volume, which is the number of shares traded in a day or month. Portfolio managers study these historical trends to predict the behavior of stock prices in the future. Fundamental analysis, on the other hand, evaluates a stock’s future price based on company sales and earnings. Money managers combine technical analysis with fundamental analysis to make decisions about stock prices.
A technical analyst may consider the price trading range for a particular stock. Assume that, over the past 12 months, a stock has traded between $30 and $45 per share. In addition to a price range, a technical analyst looks at the long-term trend in a stock’s price. In this case, assume that the stock’s price has trended up from a price in the low $30s to a current price near $45 per share.
Factoring in a Price Spike
In this scenario, if the price of the stock quickly moves below $30 or above $45, that may be a buy or sell indicator for the technical analyst. Assume that the stock has a low spike down to a trading price of $27. If the stock’s trading pattern returns to the normal trading range, the spike may be an anomaly. On the other hand, if prices start to trend downward after the low spike, the spike may be an indication that news about the company has changed investor opinions about the stock. A technical analyst may use this trend as a reason to sell the stock.
How a Trade Is Confirmed
The Securities and Exchange Commission (SEC) monitors how investment information is disclosed to investors. One SEC disclosure requirement is to provide a trade confirmation whenever a security is traded. The term spike also can refer to a trade confirmation, which is the written record of a security transaction.
The trade confirmation includes a description of the stock or bond, along with the exchange where the transaction took place. The broker confirms the number of units traded, which may be shares of stock or the par amount of bonds bought or sold, along with the security's symbol.