INVESTOR’S CORNER (3.3.10)
Follow-Through Signals A New Uptrend
INVESTOR'S BUSINESS DAILY
Monday’s follow-through in the Nasdaq is a reminder that the “M” in CAN SLIM, the investing approach that IBD follows, stands for market direction. It reminds us to invest in stocks only when the market is in an uptrend, or bullish mode. When the market turns into a correction or outright bear market, investors should retreat into cash. Being on top of the market during a shift from market correction to confirmed uptrend is crucial, since most of an uptrend’s best leaders tend to break out just after the follow-through bottoming signal. Look For Big Increase. A follow-through is a session in which at least one major index — the Dow, the NYSE composite, Nasdaq or S&P 500 — surges in higher Volume than in the previous session. This jump must occur at least four days after the market begins a rally attempt, by turning up after making a low. You start counting the rally attempt as soon as a major index starts climbing from a low. That tells you to settle in for a few days. Then, starting on the fourth day of the attempted rally—as long
as the index doesn’t undercut the low — tune your antenna for a follow-through.
A follow-through is what Investor’s Business Daily founder William J. O’Neil, in his book “How To Make Money in Stocks,” describes as a “booming gain” for at least one
of the major indexes. Optimally, you want to see volume aboveits50-day average on whatever index follows through. This helps to verify that institutional investors are buying stocks.
March 2009 Follow-Through Last year, the market made new lows but bottomed on March6. In this case, the rally attempt started the same day the NYSE composite
made its low. Indexes often make their lows and close higher the next day.
The market moved steadily higher in healthy volume, never undercutting the prior low. The market’s attempted Rally was under way. On March 12, the fifth day of the
rally attempt, the major indexes followed through as the NYSE, Nasdaq and S&P 500 all soared 3.5% or more. Volume was above average and higher than the previous day’s on
both the NYSE and Nasdaq. This is a recent example. But stock market history shows that every bull market began with a follow through. It’s important to remember that
not every follow-through results in a sustained uptrend. That means a follow-through is
not a signal to buy carelessly. If you do jump into a stock at the time of or soon after the follow through, make sure it is well-researched and breaking out of a sound base. Once you are in, keep close tabs on the stock’s behavior and your sell rules close at hand.
If your stock begins to slip, sell at no more than a 7% to 8% loss. If the rally fizzles, your cash will be right where you need it when the real follow-through arrives. Observe Leading Stocks. Watch the action of leading stocks. They should be breaking out
of bases, confirming that institutional investors are pouring their capital into stocks. If market leaders aren’t acting bullishly, it’s a sign that the follow-through is weak.