As our country tries to regain balance in today’s increasingly unstable economy, businesses everywhere are succumbing to bankruptcy. Although no one likes to see our economy struggle, day-traders have a unique opportunity to make the best of a bad situation.
Earlier this week, American Airlines ($AMR) crashed as the company filed for bankruptcy, dropping 88% from $1.62 to $0.20 as scrambling shareholders oversold short. What many day-traders do not know, is that AMR was destined to bounce back almost immediately.
In the past 30 years, a trend has developed where stocks of big businesses filing for bankruptcy will come back up an average of 18% within a week of the initial crash. This has proven true for the 20 largest corporations in the United States to file bankruptcy since 1980, according to Bloomberg and Bankruptcy.com.
This theory held fast for AMR, as it jumped back up almost 100%, from $0.20 to just under $0.40 in the two days after they filed. In 2009, the same trend applied to the General Motors (GM) crash and Sirius XM Radio (SIRI) .
The bounce back trend develops when traders try to catch the stock on the counter trend. Market makers anticipate this exaggerated move, and force the stock to rebound by purchasing shares at the after-crash prices.
Traders should take caution though; this is not a type of stock you should hold on to. These stocks behave like a super ball thrown out a window; it will bounce back up, but will fall again and the recurring bounces will never reach the original price.
Day-traders should be aware of this trend, and take advantage of it when big business catastrophes are reflected in their stocks as tremendous short term gains are almost always guaranteed.
Fausto Pugliese is the founder and president of Cyber Trading University, a world leader in online education and training for traders and investors in the markets. You can reach Fausto at firstname.lastname@example.org or follow him on Twitter and Facebook.
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