Posted by Could last week have been the market bottom?
The concept of a Follow Through Day has been known in the trading world since William O’Neil popularized the idea in his bestseller How to Make Money in Stocks. It represents the confirmation of an uptrend arising from a market bottom – at least in theory. Applying that concept to the current market, one can make an interesting observation…
As we’ve all seen since its peak at the beginning of the year, the S&P 500 has been in a steady trend downward, hitting lower lows nearly every week this year, and it closed at the YTD low of 4170.70 on Mar 8:
The NASDAQ composite index peaked in November, and with the exception of the Santa Claus Rally, has also trended downward into bear market territory, closing a 53-week low of 12,581.22 on Mar 14:
Now according to O’Neil, Follow Through Days always occur after the market makes an attempted rally off the bottom, meaning that first the market has to reach a low point, then it needs to attempt to rally above the low point – marked by closing higher than the prior low. That marks the first day of a possible rally back into a market uptrend.
Looking at the chart, you can see several attempted rallies in the NASDAQ:
Each one of the highlighted bars could be considered attempted rallies because they show the market as closing higher after a new low was reached.
However, none of those rallies persisted because another new low was reached shortly after the attempted rally. Had one entered the market on or immediately after these attempted rallies, one likely would have lost money as the rally failed.
This is why waiting for the Follow Through Day can be helpful. O’Neil states that Follow Through Days typically occur 4 or more days into an attempted rally, with the strongest indications being between days 4 and 7.
Look at the S&P 500 as of Friday, Mar 18:
Again, it could be argued that once the NASDAQ hit a new low on Mar 14 (circled), we saw an Attempted Rally begin the next day on Mar 15, and the Follow Through Day could have occurred either on Mar 15 when the market closed 3.7% higher on 20% great volume, or on Mar 18 when the market closed 2% higher on 45% greater volume.
Identifying an attempted rally is not an exact science, however, looking at the chart of the NASDAQ above, there was an attempted rally off the low on Jan 24, with a Follow Through Day observed 5 days later on Jan 31, when the NASDAQ rose 3.4% that day, on volume that was 3% higher than the day before. That Follow Through Day failed 9 days later on Feb 11.
That’s why when one identifies such a Follow Through Day, one shouldn’t just jump in and put all your money to work in the market – instead, think of a Follow Through Day as an indication that one can start putting money to work, a bit at a time. Interesting things can happen when you buy stocks in a bear market.
Perhaps we just received the signal to start getting back in… or perhaps not. Time will tell.
… Or maybe all of the moves are due to it being a triple witching day on Friday and this is all a bear market rally with more pain to come.
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