Spring or Shakeout

Spring or shakeout action is an important event in the charts that chartists love to see. It usually occurs at the bottom or support of a trading range, and allow large operators to test the available supply before the markup. The price trades below the support line and closes above it during an intraday trading. Additionally, chartist prefers to see this candle with high volume trading. It shows the price has bottomed and rally is imminent.

Example 1:

The Doji closed at the opening price with higher volume compared to the previous 3 trading days. It showed the price refused to trade lower and it was being absorbed by the strong hands. If you are an observant, you will notice there were two candles with higher volume before this spring action. This further confirms the spring action and the stock rallied 77% in 2 months.

Example 2:

I was trading this stock, the first rally provided me with a handsome gain and I was still bullish on this stock. During the consolidation, the two upthrust candles with high volume prompted me to think there were supplies and I was cautious on this stock. On the spring day, the stock opened below the support line and I was monitoring it very closely. If it continued to trade lower I will have to sell my holdings. Fortunately, the stock closed above the support and it formed a spring candle. A few days later, the rally continued.

Author: Gerald Koh