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Monday’s shake-out move is hallmarked by a wide spread down, which then reverses to close on the highs, accompanied by high volume. This dramatic maneuver is usually carried out on ‘bad new’. This is a moneymaking move to catch stops. Those who are long in the market are forced to cover. Those traders who were thinking bullish are now fearful to enter the market. Those who shorted the market will be forced to buy back later. For the market to close on, or near, the highs, shows that the professional money is covering short positions (buying), and absorbing the panic sellers who are being shaken-out by the drastic fall in price. If the professional money had refused to do this, it is unlikely that the price would close on the highs, with high volume.
Shake-outs occur when the market has been bullish – however, residual supply will be present, which has caused problems by making the market sluggish, stopping higher prices. As the professional operators are bullish, they have to remove the latent supply, so they shake the market out on bad news, which then allows for higher prices.
Two primary signs of strength that you should look for at the bottom of a market are:
Testing is one of the best indications of strength. The prices will be marked down rapidly during the day, (or any other timeframe), but the price then recovers to close on the high of the day, and will be accompanied by low volume. This is clearly visible today.
A shake-out will also stop a down-move. Here, prices have gapped down and fallen alarmingly after a bearish move has already taken place. If the market gaps-up on the following day (or bar), you have all the signs of a shake-out, and a good sign of strength. This move was seen in the market today.
God bless you!
Prof. Sameer Jain [Student of Market], E-Mail: Sameer@hbjcapital.com
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