Gap Down in Price Usually Caused by Bad News

When a company announces unexpected bad news, often its stock falls precipitously on very heavy volume causing large dollar and percentage losses for the day. If a stock opens significantly below the close of the previous day and the current day's open, high, low and close are lower than the low of the previous day, there is a gap in the price chart.

For example, after withdrawing its blockbuster drug Vioxx from the market, Merck (MRK) fell from $42.29 to $30.97, a 26.77% loss in one day. The open, high, low and close were: $31.35, $31.93, $30.46 and $30.97 respectively.

Shareholders hate gap down days. Whereas Merck investors saw their stock close at $42.29 on September 29, they had no chance of selling at prices higher than $31.93 on the next day. Because a gap down is so sudden, it gives shareholders little time to react.

Bristol-Myers Squibb's (BMY) stock price took a one-two punch when BMY announced a potential blockbuster drug failed to deliver significant results and a few days later announced a cut in future earnings. Both unexpected news events caused the stock to gap down.