One key IBD stock market phrase you may hear being bounced around is "follow-through day." It is a critical point in the market cycle to help identify the likely start of a new uptrend for the main indexes.
Large gains can be made after a stock market correction bottoms, reverses direction and takes off. Big gains are usually made in the first one or two years of a new bull market.
History tends to mimic the past, and trends repeat themselves. Thus, the follow-through is one signal to recognize for a potential entry point, putting history on your side.
What Is A Stock Market Follow-Through?
A follow-through day is a technical confirmation of a new uptrend, usually seen on the Nasdaq or S&P 500. Because investors put their chart reading to use, it eliminates the emotion and hope for a turnaround.
Historically, all major market bottoms have featured a follow-through. But not all follow-throughs results in new market uptrends. Some end up being false signals.
Look for a follow-through as soon as the price closes higher than the previous day on a downtrodden index. That day starts the clock and is considered day 1 of a rally attempt. The volume or size of the gain is not crucial at this point. Day 1 also may be a day when the index falls but closes near the high of the session.
This is the time to wait and watch the index chart closely. In the following days, make sure the index stays above the low of day 1. If not, the rally attempt fails and the clock starts over.
Normally a follow-through day occurs from the fourth day through the seventh day of the attempted rally. Sometimes it can be weeks later.
Look for the index to make a big gain — at least 1% and sometimes more — in heavier volume than the prior day. Heavier volume than the average daily volume is ideal.
Nasdaq Had Textbook Follow-Through
The Nasdaq Composite hit a low on March 12, 2003 (1). The Dow Jones Industrial Average and the S&P 500 Index also hit lows that day.
Despite the new low, the Nasdaq closed 0.6% higher. That started the count for the rally attempt. It traded in 12% higher volume than the previous day, although at this stage the volume wasn't much of a factor.
Notice that on day 2 the index gapped up on higher-than-average daily volume, testing resistance at the 50-day moving average (2).
Day 3 closed down slightly, on above average daily volume. Day 4 was the follow-through day as the Nasdaq soared 3.9% (3) in 35% higher volume, also above the daily average volume (4). The index rose above the 50-day and 200-day moving averages.
From there, the Nasdaq started its big run and peaked Jan. 26, 2004, gaining 79.1%.
