A morning panic pattern is a sell-off at or near the time the market opens. Many times traders will see stocks drop 30 to 50 percent in value. Typically, it depends on how much the stock has recently run up. At some point, the run ends, and when it does, traders will see a wall of sellers driving the market down in a short period.
Then, like all things in life, the panic stops, a wave of buyers rush in, and the stock price bounces. Timed correctly, you can ride the wave back up.
The panic eventually will set in; people will liquidate, and when they do, that’s your moment of opportunity.
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What Causes Sellers to Drive the Market Down?
Catalysts.
In plain and simple terms, a stock catalyst is any information that can cause a stock’s price to move up or down. Now you’re probably wondering what kind of information could have such a dramatic impact on a companies share price?
Well, you don’t have to look too far to find answers. From privacy issues, antitrust investigations, human rights violation allegations, poor earnings, and the threat of being broken up and sold for parts.
Take, for example, company earnings. A company missing its earning estimations can have severe impacts. People lose faith in a company pretty quickly when they get a sniff of uncertainty.
Before you know it, they start panic selling their shares. The obvious example right now is how the coronavirus pandemic is affecting stocks and sectors.
Bad News.
Moreover, have you thought about the impact of bad press? The fall from grace can be swift; look no further than the Facebook data share fiasco.
When news broke that the social media behemoth allowed British political consulting firm Cambridge Analytica and other third-party developers to access the data of more than 50 million users without their permission, the company’s stock price drop by 40% from its peak. Each of these causes a morning panic pattern.
How Do You Predict a Morning Panic Pattern?
More often than not, a stock that closed very strong in the last trading session or has had multi-day runs will create a gap up at market open. Then, almost always, the price will fall off a cliff as longs sell their shares to take profit. It’s this initial run-up that creates the conditions necessary for the morning panic dip buy.
We see the morning panic pattern play out in a lot on penny stocks as they run on hype. Consequently, close to 99% of penny stock companies see their prices fall off the cliff. So when a penny stock runs 100%, 200%, even 500% in a few days, be on alert; the crash is coming!!!!
Better yet, the more a stock runs up, i.e. the more green days in a row, the better. Keep this in mind when looking for a morning panic pattern.
How Do I Know When to Buy or Sell?
The nice thing about a morning panic pattern is that both dip buyers and short-sellers can trade it. Some even ride both sides.
Do you want to know how to dip buy the morning panic pattern?
Step 1: Look For Maximum Panic.
Look for a stock that’s taken a drop of at least 30% or more. For further confirmation, the panic needs to take out stop losses.
Step 2: Wait.
It’s always crucial to know why the stock soared in price and what spurred the panic.
Assuming it’s a solid potential dip buy, your job is to watch and wait. Always remember, panics happen swift and fact. Because of this, you don’t have to time it perfectly.
Step 3: Watch the Level 2 Turn
For penny stocks, watch the Level 2 turn. As the stock drops, you’re looking for a sudden wall of buyers — a support level. This often happens when shorts cover and dip buyers get in. Unfortunately, it’s harder to see for listed stocks. And, this could not be truer if the stock regularly trades on massive volume. Or if it’s choppy.
Step 4: Know Previous Support And Resistance Levels
Price reacts strongly to support and resistance levels. So all you need to do is identify a support level that becomes resistance (or vice versa); wait for the price to come back to this area, and enter your trade from there. This setup works for all timeframes with a morning panic pattern.
The Morning Panic Pattern Works on Any Time Frame!
Just take a look at the daily chart below for penny stock CYDY last June. Why did I pick the daily chart? Well, I already had it set to daily, so I just used that time frame as an example. As you can see, there’s overhead resistance around the $3.83 mark.
On June 22nd, the price broke through this resistance level. I don’t know why but I’m assuming some type of catalyst. For eight days, the stock skyrocketed to $10.01, an astronomical 161% gain. If you didn’t catch the run, remember what I said above about patience?
Wait for the reversal and go long. You only had eight days to wait until it came. Enter short and ride the wave for 14 days to $3.76. Miss the short wave? Wait for the bounce at support and go long. A long entry at the bottom would give you around $2 profit per share if you rode the wave back up to $8.
What to do when your stock drops 30% or more? Should you buy more, continue to hold, or sell to cut your losses? Tough choice. I suggest not panic selling shares following a dip; take a breath and plot your next move accordingly!
