A Quick Reminder About Follow-Through Days

Follow-Through Day according to IBD (Investors Business Daily):

After a significant market correction, the market will look to regain its footing. Any up day then counts as Day 1 of an attempted rally.

The next two sessions, Days 2 and 3, don’t need to show much in the way of gains. As long as they don’t undercut Day 1′s low, the rally remains intact.

For a follow-through to occur, you want it to land between Day 4 and Day 7 of the attempted rally. On any one of those days, you’re looking for one or more of the major indexes — the Nasdaq, S&P 500 or Dow — to rise 1.7% or more in higher volume than the previous day.

Though a follow-through in that span gives the strongest signal for a new rally, one that hits anywhere between Day 4 and Day 10 can work. Follow-throughs that occur after Day 10 yield lower success rates.

Though this method may seem esoteric at first, keep in mind it has decades of IBD research behind it.

Just remember: Not every follow-through triggers a huge, new bull market. But no raging bull has ever started without one.

Changing market conditions have in the past affected the price gain required to announce a follow-through. Early IBD research stretching back several decades showed that a gain of 1% could signal a market turn.

In the white-hot 1990s, that threshold grew to 2% for the tech-stuffed Nasdaq.

Today, a slower-moving index such as the Dow Jones industrial average can occasionally follow through with a smaller gain, assuming other factors are in place. The Dow followed through on Feb. 14 of 2007 with a 1.25% gain.

Remember a key caveat when it comes to follow-through days: Every bull market starts with a follow-through day. But not every follow-through day triggers a new bull market.