Shakeout + 3: A Powerful Early Entry Technique

When buying stocks showing strength, there are many repeatable patterns observed before the stock begins making new highs.

A traditional double-bottom base forms after a prolonged uptrend when the stock consolidates its gains. The shape represents an asymmetrical W with the second low always undercutting the first low in which the “weak hands” are shaken out of their shares.

The Shakeout +3 entry tactic, credited to Jesse Livermore, offers an earlier opportunity to capture a larger upside before the traditional breakout confirmation.

What Is A Shakeout?

When a stock shakes out, the price may erratically move to confuse retail investors. The stock will hastily make a new low and then quickly reclaim previous price levels.

Remember institutions move stocks. If an institution wants to continue accumulating stock but the price advanced too quickly, it may begin selling to force out weaker traders.

The heavy selling pressure may cause retail investors to get stopped out at obvious price levels. The general capitulation by many traders makes more shares available at cheaper prices.

Soon institutions will step in and accumulate all the shares that the weak hands just sold.

In a W-Bottom pattern, the traditional buy signal occurs when the price decisively breaks above the resistance level formed at the mid-point of the “W”.

Trading The Shakeout +3

The Shakeout +3 concept is an earlier entry technique based on the previous price formation. Trade with the institutions when the price quickly recovers after the stock shakes out and makes a new low.

The buying opportunity is presented when the price rises above the first low.

This strategy applies to stocks trading around $30. For stocks above $60 adjust the buy signal by adding $6 to the first low.

Similar to many trading approaches, there is an element of Art involved alongside the technical analysis. While the entry point can vary based on the stock price, a common entry area is approximately 10% above the first low of the W-formation.

Examples

Symbol: UBER
Company: Uber
Year: 2023

Click the chart above to enlarge.

What looks like a failed Cup & Handle evolved into a W-bottom base. The Shakeout +3 entry signaled on a gap up off of the low, roughly 8% before the traditional breakout.

Symbol: NVDA
Company: Nvidia
Year: 2023

Click the chart above to enlarge.

For half of a year, NVDA moved sideways and didn’t flash any traditional buy signals. Looking closer, there was a shakeout +3 (10%) buy area after the stock moved quickly off a new low.

Symbol: ELF
Company: e.l.f. Beauty
Year: 2023

Click the chart above to enlarge.

Remember this is more of an art than a science – When ELF gapped up off the low, the Shakeout +3 buy signaled as a dollar and a percentage value.

Symbol: SNOW
Company: Snowflake Inc.
Year: 2023

Click the chart above to enlarge.

You’ll begin to notice this entry tactic gets you in much sooner than the traditional buy areas. A lower cost basis allows for a larger profit cushion letting you hold the stock through normal corrections.

The Takeaway

Traditional base breakouts are known by many traders and often become failure-prone with too many people trading in congested support and resistance areas.

Buy after a shakeout when the price is $3, or 10%, above the first low.

When developing a system to gain an edge over other traders, look for alternative entries on a chart to get in before other traders.

The Shakeout +3 is an early entry that immediately puts you in a position of strength.