Now that the market is in a correction, we are on the lookout for a follow-through day, which can signify that a change in trend has occurred. A follow-through day is a strong up day, where the market is typically up >=1.25% with higher volume than the prior day. This signals that institutions are starting to re-enter the market.

 

 

Before you have a follow-through day, though, you first need a rally attempt. A rally attempt normally begins with your first day up, off recent lows. That up day is day #1. A follow-through day can only occur on day four or later of a rally attempt. I have marked up the Nasdaq chart from 2010 to illustrate this point. We’re not trying to buy at the lows, since we all know how painful catching a falling knife can be. Our strategy is to wade into the market as it strengthens (just as we wade out of the market as it weakens). Waiting for a follow-through day will put the risk/reward ratio in our favor, so that we can have more conviction in our purchases. For example, you might see a lot of green on the screen today, but we have low volume on the indexes and on many leading stocks. That action, coupled with the fact that we have not yet had a follow-through day, undermines our conviction and makes us remain rightly suspect of their behavior at this point

 

Best returns,


Scott O’Neil

President

MarketSmith Incorporated

Follow Scott O'Neil at Twitter.com/WScottOneil