Follow-Through Day

As suspected early yesterday a FTD did come and the IBD market call is rally in a confirmed uptrend.

Follow-Through Days occur on the 4th day or later in a possible rally. On rare occasions it can occur on day-3. In this case days 1, 2 and 3 will all be explosive large moves upward on expanding volume. O’Neil has said that the strongest period for a FTD is day-4 through day-7 but a FTD can occur anytime later. I remember a good rally ensuing after a day-21 FTD.

The reason we wait until day-4 is that short covering makes it difficult to determine what kind of buying is going on in the initial rally off of the bottom. On day-4 or so if we see strong buying (large move upward on volume higher than the day before) we are more sure that the buying is caused by institutions buying stocks to own rather than just covering their short positions.

On day-1 of a possible rally the market closes up after a downtrend. The count keeps alive as long as the lows of the downtrend is not undercut (making a new low). Day-1 was August 9. On day-10 we came close but did not undercut. Yesterday was a day-11 FTD. Notice that the volume was higher than the day before.

Please remember that a FTD is only part of the picture of how a successful rally begins. Leading stocks breaking out of sound bases is the other requirement. Remember that proper buy points in a sound base are within 15% of 52-week highs and that the base structure should be identifiable as a cup with handle or double bottom base and that the handle should be in the upper portion of the base and that the volume should have dried up at key places in the base such as in the handle and along the bottom of the base and also there should be regions of tight closes on a weekly chart within the base. There are few sound bases out there, you should expect many sound bases to begin a new uptrend that has the staying power to establish a tradable rally.

In my studies a 4% one-day move in any direction in a major market index is probably part of a bear market structure. Yesterday’s 4.3% move in the NASDAQ is suspect. The only time I have found this size of move constructive is when transitioning from a bear market to a bull market. Is that what this is? We haven’t quite seen a bear market correction of 20% yet and most bear markets contain three-legs down, we have seen only one. My personal view is to take this FTD as probably failure prone and to tread lightly. It is quite possible that we rally up to resistance and roll over into a second down leg. Resistance is quite a ways higher so we might see a tradable junk off the bottom rally