On this week’s Mullooly Asset Management video, Tim explains a point and figure pattern called the shakeout. While we refer to it as the shakeout, technically its name is the bullish shakeout formation. Like some other point and figure patterns, you can probably imply whether it’s a positive or negative development based off its name. The shakeout is most certainly a bullish pattern, as well as an interesting one because it contains both buy signals and sell signals within it.
The shakeout formation is one of Tom Dorsey‘s favorite patterns due to its high degree of reliability. This pattern should be looked for during strong bull markets.
Characteristics of a Shakeout
– The security and overall market should be in a strong uptrend.
– The security should be in a positive trend on its point and figure chart. A positive trend means trading above its bullish support line. Check out our video on bullish support lines here: https://mullooly.net/what-is-a-bullish-support-line/8037
– The security forms, but does not break a double top.
– It then breaks a double bottom sell signal, which is the first sell signal in its otherwise long uptrend.
– The “action point” of a shakeout occurs when the security reverses into X’s following the double bottom sell signal.
– The shakeout pattern is completed with a triple top buy signal.
It’s also important to determine whether the security has strong relative strength compared to the overall market. This is determined by its relative strength chart being on a buy signal or, at least, in X’s versus the market. We’ll discuss relative strength charts in future videos.
Make sure to watch the video, Tim’s visual example makes this pattern much easier to understand.
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