|
|||
POINT AND FIGURE LIBRARY
The Chart Formations
The Bullish and Bearish Shakeout
This is one of my favourite signals. It too was discovered by Earl Blumenthal.
The heart of the bullish shakeout signal is a decline by a share or index which breaches a double bottom. Traditionally that has been regarded as a negative development, and as the bulls perceive that support in the market has not held, liquidation takes place. Other traders may enter short positions. But if the market makes a 3 box reversal within a box or two of breaching the double bottom and then reverses, it is often a trap. In fact, Earl Blumenthal’s thesis was that the first sell signal in a bull market is actually a buy signal! Earl Blumenthal only applied this signal to the first breach of a double bottom in an uptrend, but I take an expanded view. My criteria for the bullish shakeout are:
1. The previous signal given by the share must have been a bullish one.
2. As the market declines, a double bottom is breached by 1 box or 2 boxes (if the box value is high) but no more than 3 boxes (if the box value is not high).
3. The market then executes an upward 3 box reversal. BUY and place a stop and reverse below the lows i.e 4 boxes away.
In this formation, like the bull trap, the buy signal occurs on the first 3 box reversal. In virtually all other point & figure formations the buy signal comes only after a consolidation phase has ended by a breakout. It follows that the risk/reward ratio is very good. All one is risking is 4 boxes.
What I like about this formation is that it gives one a double option. Do you see what would happen if no trap results - if the breach of the double bottom really was an early signal of coming weakness? The chart pattern would convert itself into a descending triple bottom.
It follows that one has the market surrounded. Either the shakeout will prove to be a profitable buy signal, or a descending triple bottom sell signal will be given which itself should be profitable. Of course it is possible that the shakeout signal will cause a loss, and the descending triple bottom will cause a loss as well, but that is very, very rare. I find this formation has a high level of accuracy, particularly if measured over a short period
The opposite is the bearish shakeout. See how Vodafone gave 2 classic bearish shakeout sell signals in the first half of 2002.
The first sell signal at 177p was not countermanded at any point before the lows at 93p. The same is true of the second sell signal at 141p.
|
||
 |
