The most profitable time in a new bull market is in the first one or two years. Naturally, this incentivizes investors to try to bottom-pick the stock market. But since that is a bad idea and could cost you dearly, IBD has the next best thing: the follow-through day.
Every great bull market in history has started with a rally attempt. But until the rally is confirmed with a strong price and volume follow-through day, all you have is an attempt.
What Is A Stock Market Follow-Through?
Following a significant market decline, an attempted stock market rally begins when a major index closes higher than the previous session. The percentage gain and volume do not matter at this point; we're just looking for an up bar.
If the index closes lower but in the upper half of its daily price range, this is also acceptable as the first day of a rally attempt. This is called a "pink rally day," a reference to the color of down bars in IBD Charts and IBD MarketSurge.
Whether blue or pink, as long as the index does not undercut the low of the rally day, the rally attempt will stay alive. If it undercuts that low, the rally fails, and you will need to watch for the next one.
A follow-through signal can occur as early as the fourth day of a rally. Waiting these few extra days is crucial. Often you find that the stock market has not hit bottom. An index may even reverse higher the next day but this "strength" may be due to investors covering short positions.
The follow-through is when the index delivers a strong gain in volume greater than the previous session. The volume does not need to be above average, just above the prior day's. The percentage gain required is usually 1%, although in more volatile stock markets a gain of 1.25% may be needed.
The Nov. 1, 2023, follow-through in the Nasdaq came with a 1.6% gain on the fourth day of its rally.
If your follow-through day meets these requirements, that's your green light. However, most people forget that a green light does not mean "hit the gas." A green light means, "if you can proceed safely, it's now your turn."
Don't get fully invested on the very next stock you see. After a follow-through day, you can begin increasing your exposure with stocks coming out of sound chart bases.
The Covid Market Crash Follow-Through
The bottom from the 2020 pandemic market crash was sharp yet bumpy. On the Nasdaq, rally attempts that began on Feb. 28 (1) and March 17 (2) failed.
The index made its low on March 23 with a pink rally day as the index closed 0.3% lower but in the upper half of the day's range (3). The next day, the Nasdaq soared more than 8%. Still, it was too soon for a follow-through. March 26 saw the composite jump more than 5%, but volume was lower. Again, the signal was premature.
Confirmation would not come until April 6, on the 11th day of the stock market rally attempt (4). The Nasdaq surged 7.3% in volume 9% higher than the prior session. Thus began the Nasdaq's 40%-plus run.
