Shakeout

Spring/Shakeout. The Most Important Event in TRADING


Shaking is the key event all Wyckoff operators are waiting for. There is no other event that adds greater strength to the analysis and this makes it, from my point of view, the most important event that can occur in the financial markets.

After a period in which large traders will have built up a large part of the position they want, they use this behaviour as a turning point when it comes to creating the trend movement that will take the price out of range.

In order for us to be waiting to see a potential shake, two actions must have occurred previously:

  • The stop of the previous trend movement, whether with climatic volume or not.
  • The construction of a significant cause. This is the development of Phase B, in which we deduce that the professional has been absorbing stock.

Addition game 0

As we know, due to the functioning of the financial markets based on the law of supply and demand, in order for an order to be executed, it must be paired with another order whose intention is the opposite. This means that for a sale (bid) transaction to be executed, it must be matched with a purchase (ask) transaction and vice versa.

This is very important to know since in the event we are dealing with, as in the other two cheating events (Preliminary Stop and Climax) all orders whose origin comes from ill-informed operators or weak hands are being absorbed by well-informed operators or strong hands.

The critical factor when analyzing this event is to determine the aggressiveness with which the key zone is being broken and how the market reacts immediately afterwards to this action.

Behavior

The action is simple: it is a movement of rupture of a previous liquidity area (areas where there will be located a large number of pending orders of execution) that initially denotes intentionality towards the direction of the rupture but that in reality is a new deception.

What will happen is a false break where the big traders will assume all those pending orders in order to start the trend movement they expect.

This is the way financial markets move: by the search for liquidity. If large traders were not able to find the counterparty they need to match their orders, the market would be impossible to move. Therefore, they need to create the feeling that this is a genuine break movement in order to attract more traders and absorb all those orders.

If we take any graph, independently of the market or temporality, we will see that for any significant trend movement, a jolt has previously developed. It’s necessary. That crossing of orders is the gasoline they need to get around.

Understanding this will elevate your trading some levels because you will begin to be more aware of this possibility and over time you will learn to profit from its behavior.

 

How the Spring appears on the graph

Normally, shaking will come in different forms:

Spring shakeout

On 1 candle

This is the commonly known hammer sail. It is a candle that penetrates the zone of liquidity and that returns practically the totality of the movement inside that same candle, leaving a significant tail in its end

These fuses what denotes is a rejection of prices to keep moving in that direction. Aggressiveness has been found on the part of the operators that were waiting in the opposite direction to the breakout and these have managed to capture at least temporarily with the control of the market.

Pattern of 2 or more candles

The background of the action is exactly the same as for the example of a candle. The only difference is that on this possibility the behavior develops over a greater temporal space.

The fact that the price takes longer before reversing and recovering the previously established breaking zone is a symptom of less strength for the shock. In other words, the less time the turn occurs, the greater the strength will denote the shock.

 

Minor structure

In this possibility the price is kept for a longer period of time in position of potential shake.

The control of the market is not very defined and that is why a smaller structure is required which will eventually act as a function of the jolt of the larger structure. This is a clear example of the importance of context.

  • In potential Spring position we are looking for a smaller accumulation structure that will generate the bullish turn.
  • In potential position Uptrust After Distribution we are looking for a smaller distribution structure that will generate the bearish turn.

Shaking functions

This movement initiated by the big operators has several functions:

 

Expel rupture operators from the market

Previously we presented them as greedy. They are those operators who see the price make a new extreme and thinking that it is a break that will have continuity, enter the market by adding more pressure to prices.

It is important to note that it is not only manual operators who, guided by their emotions, will enter the market. An innumerable number of automatic strategies programmed to operate breakout systems will generate input signals at these levels.

These robots may activate other momentum strategies, which will add even more pressure to the movement, which is why these types of shocks are often identified with a considerable increase in volume. It is an important trading area for many strategies and will therefore lead to the crossing of a large number of orders.

 

Expelling the fearful from the market

This group has been holding losing positions for a long period of time and its limit is very close. After seeing the price move again against them and for fear of further increasing the loss, they finally decide to abandon their position.

 

Kick the smart ones out of the market

Generally they tend to have a good market reading and have correctly anticipated the price turn, but have rushed into entry. They may have already sold on the climatic event or on some minor Spring within the range.

This new unexpected final shock for them makes them abandon their position by executing their protection stops.

 

Succeeding with the maneuver

The professionals who unbalance the market and cause the breakout movement, take advantage of the displacement caused by the rupture operations and close their positions obtaining a profit with the difference.

 

Indications to know if we are facing a potential shakeout

The two elements to observe in order to try to determine a greater probability that we are facing a shock instead of an effective break are the following:

 

The type of ST that happens in Phase B

If we have previously identified a Secondary Test in the form of Upthrust Action (UA), this denotes greater strength to the buyers and therefore in zone of minimum breakout of the structure we favor the Spring instead of the bass breakout.

If what has left the price is a Secondary Test in the form of Sign of Weakness (mSOW), denotes strength of the sellers and in zone of maximum rupture of the structure we favor that happens the Upthrust instead of the effective bullish rupture.

 

Price behaviour after breakout

If after the breakout of the lower part of the structure the price fails to stay below and re-enters the range again, it denotes strong purchase entry and adds greater probability that the breakout is false and that a Spring is therefore developing.

If after the break in resistance the price fails to stay above the level, it denotes weakness and adds a greater probability that the break is false and therefore an upthrust will develop.

 

Avoid labeling errors

It is important to clarify that the jolt can only be labeled as Spring or Upthrust After Distribution when it originates the rupture movement of the structure.

Spring must necessarily cause the range to break up. Anything other than this should not be labeled as Spring. It will simply be a test.

The same goes for the Upthrust After Distribution. Anything other than this bullish jerk causing the subsequent bearish break of the structure should not be labeled UTAD. A UTAD is the shaking event of the maximums of the structure but it must also cause the bass break and the beginning of the tendential movement out of range.

I repeat, to be faithful to the methodology, anything other than that would be badly labeled.

Spring/Shakeout

The term Spring  is an abbreviation of the word “Springboard“.

This concept was presented by Robert G. Evans, an outstanding student of Richard D. Wyckoff and is a refinement of the original concept developed by Wyckoff, which is known as Terminal Shakeout. Wyckoff referred to this term as a position that reaches the market during the development of an accumulation range in which the price is in a position to leave it to initiate an upward movement.

We recall that an accumulation range is a Phase of the market cycle (which is composed of the accumulation, uptrend, distribution and downtrend Phases) in which large market operators perceive value in the price (they find it undervalued) and carry out a buying process with the intention of selling at higher prices and making a profit from the difference.

The Spring event describes a bearish movement that breaks a previous support area and whose purpose is to carry out a transfer of shares from the weak hands (traders potentially manipulable due to their ignorance of the functioning of the market and because they operate based on their emotions) to the strong hands (large traders).

 

Types of Spring

At the moment of the breakout of the support, we must remain very attentive and carefully observe the behavior of the price and volume. If we are already within a buy position, depending on how the price drops we will decide whether to stay within the trade or exit immediately. If you see a strong rebound from the level with a slight increase in volume, it indicates that the value is developing technical strength.

Three types are differentiated on the basis of the degree of supply observed at the time of breakout:

 

Spring #1 o Terminal Shakeout

Spring #1

The offer appears strongly (great seller interest). This is evidenced by a sudden increase in volume and an expansion of price ranges that produce a large penetration of the support line.

In essence, Spring and Terminal Shakeout are all about the same action: a bearish move that breaks through a previous support area. But there are differences between them, and these can be found in the intensity (volume) and scope of their development; while Spring is used to define shorter movements with a light or moderate volume; Terminal Shakeout is used to define movements with a much deeper penetration and with a high volume.

The offer is in control of the situation. There is extreme weakness and the price falls. For this type of Spring to be successful, there must be a strong inflow of demand that drives the price back up with wide price ranges and a relatively high volume.

A first indication that demand may be entering is if after penetration, the volume remains high but price ranges begin to decrease.

If demand does not appear, the price will continue to fall and you will have to build a new accumulation area before a substantial upward movement can take place.

 

Spring #2

Spring #2

Moderate penetration is observed as the price breaks down with an increase in both volume and price ranges.

There is a floating offer (operators willing to sell), but it is not as overwhelming as in Spring #1. That latent offer will have to be absorbed by the professionals in case they want to make rise to the price, reason why the most probable thing is that we will see successive tests to this zone.

 

Spring #3

Spring #3

There is an exhaustion of the offer (lack of aggressive saleswoman). This is evidenced by a slight reach in the break, with a decrease in volume and a narrowing of price ranges; suggesting a total lack of interest on the downside.

This is a very powerful Spring on which you can directly take purchase positions.

 

We can also find a last variant in which the event takes place within the limits of the range. This event denotes greater background strength, although professionals prefer the jolt to occur beyond the range because it does a better job of cleaning up the remaining supply of weak hands.

Spring action is an important sign of strength since failure to break provides us with a greater degree of confidence when it comes to taking action at a later date.

 

El Ordinary Shakeout

Ordinary Shakeout

Spring and Terminal Shakeout are two similar events which occur during the development of an accumulation range. But there is another variant; the Ordinary Shakeout, which is defined as a strong bearish push without extensive prior preparation that occurs during the development of an uptrend (reaccumulation). This is the main difference: the location.

The Ordinary Shakeout is characterized by wide price ranges and an increase in volume. However, the volume can be high, medium or low.

 

The Spring test

With the exception of Spring #3, in the other variants it is necessary for the event to be tested since the present offer has been observed and the positive result is not guaranteed.

Be very cautious if the testing process has not taken place as it may take place at a future time. For the test to be successful, it should be developed with a narrowing of the ranges, a decrease in volume and should be kept above the level of the Spring/Shakeout. All this would indicate an exhaustion of the offer and suggests that the price is ready to initiate the bullish movement with relative ease, representing a good buy signal.

If the test does not meet these characteristics, it is considered to be a poor quality test and suggests further testing at a later date as a Spring with significant volume needs to be successfully tested before upward movement can begin.

We must train ourselves to anticipate the possible outcome of the event and be prepared to take action on our behalf quickly and decisively.

 

UpThrust After Distribution (UTAD)

Upthrust After Distribution

An Upthrust After Distribution is the bullish shock that occurs as a Phase C test event within the distribution and redistribution ranges.

This is an upward movement whose aim is to go test the ability of buyers to take prices higher to reach a key area, such as the break of previous highs.

Theoretically it is an Upthrust (UT), but when it happens in Phase C, it is called UTAD regardless of whether there were previous Upthrusts in Phase B because a previous distribution process has already taken place.

In this action the volume that will be observed will be moderate or strong, evidencing the quantity of orders that will be crossing in this key zone.

 

The Minor Upthrust After Distribution

As with the lesser Spring, it is a bullish jerk that occurs within the structure.

This jolt will reach some previous highs and although the ideal is to wait for the trap to occur at the total limits of the structure, in reality this type of minor jolt denotes greater control on the part of the sellers as they have not allowed the price to rise further and have appeared aggressively selling on those previous highs.

Although it is true that the UTAD is only the shaking event of the maximums of the structure, it is more interesting to think in functional terms and although this movement has not reached these total maximums, it is still a shaking at local maximums. This is why I consider it interesting to label this event as a minor UTAD as well, although the methodology may simply treat it as a Last Point of Supply (LPSY).

The Upthrust After Distribution Test

Although it can happen, a Secondary Test does not always appear after the UTAD. This is due to the large amount of supply entering the market, which causes the immediate bearish movement in the form of Sign of Weakness.

As with the Spring, it is generally better for the test to take place. The fact that the test does not appear may mean the loss of an opportunity, but waiting for it to happen will help you avoid taking a possible bad short position on an action that is actually a genuine bullish break (JAC/MSOS).

If there is a test, it should show less enthusiasm than the one seen about UTAD. This is generally reflected by a halt in movement below the UTAD level and a reduction in price and volume ranges, which indicates an exhaustion of buyers and confirms the distribution scenario. On the ceiling of this rise one can take sales positions.

If the test does not fall below the level that establishes the maximum UTAD or the volume is higher, you should doubt the shock even if the price is making lower maximums. The most sensible thing is to wait for some additional signal before selling (new shocks and successive successful tests).

 

Terminal Upthrust

It resembles Terminal Shakeout. It has the same features as a normal Upthrust but the scope of action is usually more severe. The volume may be extremely high or the penetration unusually large. Even so, the result is the same. In a short period of time the price re-enters the range, indicating strong downward pressure.



A clear and close text with which you will be able to learn all the elements of the Wyckoff methodology

 

 

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