Readers should now be sitting on their hands, buying no stocks and maybe tightening those stops on stocks that are performing well that they may still own. As an investor you will strive to move the sell stop up to zero as the stock moves up. Do not initiate new company positions.
The reader is now watching the market as it continues in its down trend. Last two days were up or flat on very low volume and this is usually considered a suckers rally which will try to entice you to buy more stock. You can never know where the bottom of this new down trend is otherwise we would all be rich. All you can do is select an “odds favor” point to start buying which may or may not work. The “Follow Through Day” has been widely publicized by the famous investor William O’Neil who started the Investors Business Daily newspaper. O’Neil suggests and indeed has validated that the best time to start buying stock again after a downtrend is when we have a follow through day. A follow through day does not guarantee we are starting a new uptrend however no new uptrend ever starts without a follow through day. The follow through day puts odds in your favor that a new uptrend of unknown duration and unknown gain MAY have started but this is NOT a guarantee, follow through days can and do fail.
A follow through day occurs within 4-11 days off a stock market downtrend bottom. Since the last bottom was 2 days ago we cannot expect a valid follow through day until at least the fourth day from the bottom. If a new low occurs (lower than two days ago) then the count is reset to zero and we count 4 days from that new low. The follow through occurs when the market goes up on high volume of approx 1.5% gain or better. In other words we want to see the market move up from its low then stabilize or pull back a little then move up again on high relative volume, this is the follow through day.
We need to look for follow through days because the biggest up days occur in down markets and can suck you in when you shouldn’t buy. As markets become over sold after some big falls they reverse to the upside only to fail later. The reader should not buy on a big rise in a down trend unless we have a follow through day first. The reason for this is to reduce the chance that we have a false reading that the down trend has ended. As I said before there is no guarantee and the down trend can still continue….its just odds favor.
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Ron,
ReplyDeleteDoes "Follow Through Days" apply to individual stocks?
Hi David,
ReplyDeleteIn a way follow through days on indexes can be considered similar to stocks since they are both looking for high volume up days suggesting buying interest. However there is one very big difference. Follow through days on indexes are looking for a change in market direction so you are looking at indexes like dow, nasdaq, s&p. Then when you get the follow through day the market is coming off a low (the market may be down big time at this point from its old highs). However with stocks you dont want to buy stocks coming off a low, you are looking for strength. You are looking for stocks breaking out to new highs on volume. The strongest stocks will still be close to their highs even during a downturn that has just ended. You want the strongest stocks, in other words the first stocks to be making new highs.