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Market follow through day
Quick definition
Copy link to sectionA follow-through day occurs soon after the market hits bottom. It confirms that a new market uptrend has begun.
Key details
Copy link to section- Follow through days confirm that a new upward trend has started in the financial markets
- Rather than trying to find the exact bottom, follow through days help to identify changes in trend
- They allow traders to identify the trend change sooner than most casual investors
What is a market follow through day?
Copy link to sectionA follow through day is the day that confirms a new upswing in a financial market 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.
Why is a follow-through day important for investors?
Copy link to sectionTrying 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.
What’s an example of a market follow-through day?
Copy link to sectionHistorical 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.