Market Follow-Through Day

Market Follow-Through Day

Market follow-through days occur soon after the market has hit the bottom. This page will explain how you can spot follow-through days and take advantage of them.
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Beginner
4 min read
Written by: Harry Atkins
March 15, 2020
Updated: March 4, 2021

When the stock market falls into a correction or a bear market, it’s hard to know what to do next. If you’ve sold your stocks to escape the damage caused by a market downtrend, how do you know when to jump back in? The answer is: Look for a market follow-through day.

I. What Is a Market Follow-Through Day?

A follow-through day occurs soon after the market hits bottom. It confirms that a new market uptrend has begun.

When a correction is in play, you’re looking for any day in which one of the major stock indexes (such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq) gains in price compared to the day before. That price gain counts as Day 1 of an attempted rally. Over the next two days, that index must not undercut its intraday low from Day 1. As long as it stays above that level, the rally attempt is still alive.

The follow-through day can then occur on Day 4 or later of the rally attempt. For that to happen, one or more of the major market indexes must post a big price gain in volume that’s higher than it was on the previous day. If that follow-through day occurs, a new market uptrend is confirmed. 

II. Why Is a Follow-Through Day Important for Investors?

Trying to pinpoint the bottom of the market based solely on news events is a futile exercise. By the time a strong GDP report, big corporate earnings, or other headlines confirm that the economy is on its way up, the market will usually have already clocked significant gains. The stock market usually rises before reporters, analysts, and the general public can figure out why that’s happening.

By timing your trades based on technical analysis of a follow-through day, you can jump into a new market uptrend before most people know it’s happening. That gives you the ability to land bigger trading profits. 

III. What’s an Example of a Market Follow-Through Day?

Historical research shows that no bull market in the past century has ever started without a follow-through day. The current bull market, which has lasted 11 years, is no exception.

From 2007 to early 2009, the global financial crisis walloped the stock market. During that time, the S&P 500 lost more than half of its value. After hitting bottom on March 6, 2009, the S&P began edging higher. Then on March 12, Day 5 of the attempted rally, the S&P vaulted 4.1% in higher volume than the previous session. That huge gain in higher volume confirmed the start of a new bull market, one that became the longest bull run in market history.

If a new correction sets in, you can always cut back on your holdings and wait out the market. You now know which signal to look for that will indicate you can jump back in: a market follow-through day.

Moving on…

With this lesson on follow-through days in hand, you now understand a key signal to confirm a new market uptrend. The next step comes in the next lesson, about the technical indicator called Bollinger Bands. If you’re ready to learn about Bollinger Bands, click the link below. Not yet ready? Peruse the educational articles on this site to learn more lessons on stock trading.

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