A spike is a sudden, sharp price movement up or down in a brief period. The stock market crash of Oct. 19, 1987, known as Black Monday, is an infamous example of a negative spike, with the Dow Jones Industrial Average plunging 23% in a single trading session. Upward spikes are sometimes contrasted with crashes or plunges downward. A spike can also imply an unusual and large increase in a security's trading volume.
Key Takeaways
- A spike is a sudden and large move in the price of an asset—either up or down, but it's more used for upward moves.
- Technical analysts use spikes to help make trading decisions. For instance, if the spike accompanies increasing or decreasing volume, then a trader might look to make a move.
- Spikes can occur when new information quickly enters the market, such as an earnings surprise or a Securities and Exchange Commission (SEC) investigation.
Understanding Spikes
Less drastic examples of spikes when investors react to unexpected news or events include better-than-expected earnings results. The word “spike” originates from the antiquated practice of placing paper trade order slips on a metal spike when done.
Spikes are among the data points used in technical stock analysis. Technical analysis studies trends in stock prices and 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.
Another method of studying the market, fundamental analysis, helps predict 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.
Trading a Price Spike
Technical analysts 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. Besides this price range, technical analysts will look at the long-term trend in a stock’s price.
Suppose a stock price has trended up from the low $30s to almost $45 per share. If the price quickly moves below $30 or above $45, that may be a buy or sell indicator for the technical analyst.
Now, suppose instead that a stock has a low spike down to a trading price of $27. The spike may be an anomaly if the stock’s trading pattern returns to its normal trading range. However, if prices start to trend downward after the low spike, the spike may indicate that news about the company has changed investor sentiments on the stock. Technical analysts may use this trend as a reason to sell.
Another Meaning for Spikes
Spike can also refer to a trade confirmation, the written record of a security transaction. The 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 trade confirmation describes the stock or bond and 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 symbol.
Real-World Examples
An example of a price spike (accompanied by a spike in trading volume) involves Bitcoin. Following renewed investor interest and positive market momentum, Bitcoin's price spiked between Feb. 26 and Feb. 28, 2024. The cryptocurrency's price increased from about $51,000 to almost $58,000 in just a couple of days, as shown in the chart below.
This surge was a significant recovery from its previous dip, bringing Bitcoin's total market capitalization back above $1 trillion. The rebound in Bitcoin's price can be attributed to various factors, including the introduction in early 2024 of spot Bitcoin exchange-traded funds (ETFs) in the U.S., which had a historic impact on its trading volume and price. These ETFs collectively bought bitcoins valued at several billion dollars. The successful debut of these ETFs, particularly those from BlackRock and Fidelity, marked the biggest ETF launches in history, demonstrating a growing investor interest in Bitcoin and approval by regulators.
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There are also examples of price spikes to the downside, such as rapid flash crashes (which most often have an equivalent spike back up soon after) or when trends reverse toward a bear market. These downward spikes can be triggered by negative events, such as the price of the S&P 500 index during the onset of the COVID-19 pandemic in late February through early March of 2020.
The COVID-19-related crash was fueled by growing market instability and fears of coming recession amid lockdowns and quarantines. There were several severe daily spikes downward in February and March 2020, with the largest on March 16, called "Black Monday II," when the Dow declined even further, losing 3,000 points and wiping out 12.9% of its value. Various global stock markets entered a bear market but started recovering by the end of April 2020, although U.S. indexes took until almost the end of 2020 to return to their pre-crash levels.
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What Causes Price Spikes in Financial Markets?
Price spikes can result from sudden market news, earnings reports exceeding expectations, or external economic events affecting investor sentiment. They happen when a rapid volume of buy or sell orders absorbs the supply of liquidity in the market, leaving little support at present price levels.
What Is a Flash Crash?
Flash crashes are defined by a downward spike in price followed soon after by an upward spike back, usually accompanied by increased trading volume. They are generally caused by some error in algorithmic trading systems or because of a "fat finger," and the market recovers within the same trading day, usually within minutes.
What Does it Mean When Interest Rates Spike?
An interest rate spike means a rapid increase in interest rates, which can affect both borrowers and investors. Interest rate spikes typically indicate tightening monetary policy or the market prediction inflation, affecting borrowing costs, consumer spending, and investment. Higher rates can slow economic growth by making loans more expensive, but they also suggest efforts to control inflation or respond to a strengthening economy.
Can a Price Spike Indicate a Market Correction?
Sometimes, especially if the spike deviates significantly from a security's historical trading range, it might signal an overreaction that could lead to a market correction. Analysts may view spikes, especially those accompanied by high trading volume, as indicators of potential trend reversals, including corrections.
The Bottom Line
A price spike occurs when there is a sudden and rapid increase or decrease in price—though a downward price spike is usually called a crash. These sudden movements can reflect various market dynamics, including reactions to news, economic indicators, or changes in market sentiment. These moves are significant for investors and can signal potential prospects or risks, influencing their trading decisions. Understanding the context and volume accompanying spikes is crucial for interpreting their impact on market trends and future price directions.
