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Is a shakeout good for a stock? (undercut and rally)

As a matter of fact the undercut and rally setup is based on a shakeout.

However if you are referring to shakeouts in stocks which are close to breaking out, then the answer is a yes!

A shakeout is a test of demand and supply.

When a stock is able to absorb swift selling by closing strong the same day on high volume, it can be considered support! If a stock sells off some and closes at the lower end of the daily range on normal or low volume, then you would have to wait for the next day to see if buyers are able to win the argument over sellers. A sell-off closing weak (under PLL or short term MA support) on high volume is a red flag and probably not a shakeout.

However sometimes when volume is generally low a perceived high volume sell-off day can be followed by an ever higher blue bar or even a breakout. Therefore price and volume has to be analyzed relative to the history of the stock at hand.

A shakeout is needed in most cases, especially in todays environment. Stocks move in a way to leave most weak hands behind. They do this by either…

A) blasting higher in rapid fashion

B) gapping up overnight

C) going higher after severe shakeouts.

In the case of C) the shakeout is often followed by some quiet and tight action to further draw attention away.

Take a look at the following questions and answers to learn more about the undercut and rally setup:

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