Today’s Stock Market Review
Today, we’re going to cover a concept that can significantly impact your investment decisions and help you catch the beginning of major market trends: the follow-through day. Whether you’re a seasoned investor or just starting, understanding this powerful signal can be the difference between capitalizing on a bull run or getting left behind.
What is a Follow-Through Day?
A follow-through day is a crucial signal that confirms the start of a new uptrend following a market correction or bear market. Think of it as the market’s way of saying, “This rally might have legs.” But identifying a follow-through day isn’t as straightforward as it might seem; it requires attention to specific market behaviors and patterns.
In simple terms, a follow-through day occurs 4 to 7 sessions into an attempted rally off a market low. We look for one of the major indexes—such as the S&P 500, Nasdaq, or Dow Jones Industrial Average—to post a significant gain on higher volume than the previous day. This gain should be at least 1%, but ideally, it should be between 1.5% to 1.7%, or even up to 2%, depending on the breadth of the rally attempt.
Why Breadth of Participation Matters
Here’s where things get interesting. If the rally is driven by only a handful of stocks within the index, it has a higher probability of failing. However, if the rally is widespread, with many stocks participating, the chances of success are much higher. This is why a stronger move is needed if participation is low. On the other hand, if many stocks are participating and multiple indexes are up by 1% or more on the day, the follow-through day is more valid and reliable.
The Evolution of the Follow-Through Day
William O’Neil originally set the standard for a follow-through day as a 1% gain on a major index. However, as institutional investors began to catch on, O’Neil and his team realized they needed to adapt to prevent manipulation by large institutions. This led to an increase in the required percentage gain, particularly for the Nasdaq and Dow, to ensure the follow-through day was a reliable signal.
Over the years, we’ve seen this minimum gain threshold move up to 1.5%, and even to 1.7% or 2%, to better identify legitimate follow-through days and avoid the pitfalls of manipulated or faulty signals.
How to Spot a Follow-Through Day
When observing an attempted rally, focus on whether it sustains momentum between the third and tenth day of recovery. The first and second days of a rally don’t reliably indicate a market turn, so they can often be disregarded. Instead, pay attention to follow-through days.
The primary factor to watch is a significant lift in price—ideally 1.5% or more—on one of the major indexes. The secondary factor is whether this price increase is accompanied by a rise in volume compared to the previous day. William O’Neil emphasizes that a follow-through day should feel like an explosive rally—strong, decisive, and conclusive—not something that barely ekes out a gain.
Real-World Examples
Let’s take a look at some real-world examples to better understand this concept.
In March 2009, right at the end of the financial crisis, the S&P 500 hit a low on March 6th. Two trading days later, on March 10th, the S&P 500 surged 5.9% on higher volume, marking a powerful follow-through day. Then, just two days later, on March 12th, the S&P rose another 3.9% on increased volume. This early follow-through day, followed closely by another strong performance, was a clear bullish signal. What followed was a strong bull market that lasted through the end of 2021.
Fast forward to 2020, and we had a similar situation. The market hit bottom on March 23rd, 2020. By April 2nd, the market was up 2.3% on an increase in volume, signaling a follow-through day that marked the start of a new uptrend.
The Follow-Through Day is a Tool, Not a Guarantee
It’s important to remember that not all follow-through days lead to sustained uptrends. In fact, many fail. This is why it’s crucial to look at the overall market context. Are leading stocks breaking out of sound bases? Is there clear sector leadership emerging? Are multiple major indexes showing strength? These are the questions you need to ask yourself.
Missing the follow-through day isn’t the end of the world. The follow-through day is just the starting gun; the race is still young. What’s crucial is that you’re ready to act when you see those high-quality stocks breaking out.
Key Takeaways: The Recap
Before we wrap up, let’s do a quick recap of what we’ve learned:
- A follow-through day typically occurs 4 to 7 sessions into a rally attempt, but can rarely happen as early as day 3.
- We’re looking for an absolute minimum gain of 1%, with the possibility of 1.5%, 1.7%, or even 2% on one of the major indexes, and this should be happening on above-average volume that is higher than the previous day.
- The concept has evolved over time, with the required percentage increase rising to combat potential manipulation.
- It’s a sign of potential strength, but not a guarantee.
- Look for confirmation in the form of leading stocks breaking out.
- Use it as part of your overall market analysis, not in isolation.
- It’s a signal to start buying cautiously, not to go all in.
Conclusion
Remember, success in the market comes from being prepared, patient, and disciplined. The follow-through day is just one tool in your toolbox. Use it wisely, and it can help you catch those big, profitable trends that we’re all after.
