Morning Panic Pattern

How to Trade the Morning Panic Pattern

6 min read

A morning panic pattern is a sell-off at or near the time the market opens. Traders often 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 quickly.

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.

In plain and simple terms, a stock catalyst is any information that can cause a stock’s price to increase or decrease. Now, you’re probably wondering what kind of information could dramatically impact a company’s share price.

You don’t have to look too far to find answers to 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 to panic-selling their shares. The obvious example is how the coronavirus pandemic affects 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 dropped 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 when the market opens. Then, the price will almost always fall off a cliff if they sell their shares to make a profit. This initial run-up creates the conditions necessary for the morning panic dip buy.

We see the morning panic pattern play out 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%, or even 500% in a few days, be 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.

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The Morning Panic Pattern Works on Any Time Frame!

Just look at the daily chart below for penny stock CYDY last June. Why did I pick the daily chart? 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’m assuming some type of catalyst. The stock skyrocketed to $10.01 for eight days, an astronomical 161% gain. Remember what I said above about patience if you didn’t catch the run?

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 for $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. 

Morning Panic Pattern Example

What should you 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!

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 by the morning panic pattern

Step 1: Look For Maximum Panic.

Look for a stock that’s dropped at least 30% or more. For further confirmation, the panic needs to take out stop losses. 

Step 2: Wait.

It’s crucial to know why the stock soared in price and what spurred the panic. 

Assuming it’s a solid potential dip buy, you must watch and wait. Always remember, panics happen swiftly and in 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 resistant (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.

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