Follow-Through Signals Market Uptrend

Big stock gains that vanish can force an investor to rethink everything. The follow-through essentially tells investors when it's safe to start buying quality stocks again. It's not about perfection, though. While no rally has ever begun without one, not every follow-through day succeeds.

That's why you don't want to jump back in the market 100% on a follow-through day. You want to start buying in stages and let the rally prove itself.

In late 1961, he studied what went wrong and learned how to handle the sell side, says the founder and chairman of IBD. Along the way, he also discovered a way to identify a market bottom.

It's called a follow-through day.

The follow-through essentially tells investors when it's safe to start buying quality stocks again.

In the 47 years since he began tracking this signal, O'Neil says he's never seen a bull market that didn't begin with a follow-through day. It's not about perfection, though. While no rally has ever begun without one, not every follow-through day succeeds.

That's why you don't want to jump back in the market 100% on a follow-through day. You want to start buying in stages and let the rally prove itself.

Here's how the follow-through day works:
1. When the market is in a correction, look for at least one major index — the Nasdaq, the S&P 500, the NYSE composite or the Dow — trying to rally.

2. The first day that the index closes higher counts as Day 1 of its attempted rally.

3. The action on Day 2 and Day 3 is irrelevant as long as the index doesn't undercut its recent low. If it is undercut, the rally try is done and the market needs to try again.

4. On Day 4 and later, you are looking for the index to rise sharply in higher volume than the previous session's.
When that happens, you can begin to buy fundamentally strong stocks that are breaking out in volume.

This isn't always an easy mechanism to follow. The follow-through day often comes amid the deepest gloom of a correction.

Emotionally, investors want to forget about the market by the time it hits bottom.

What you should forget is the fearful voices you are hearing. Instead, heed the follow-through signal.

INVESTOR'S BUSINESS DAILY