This is my response to an email I received on Seeking Alpha:
Hi DFT. I will post this defition of a Follow-Through Day from IBD and then go over the days in detail to explain how the follow-through day occured and then what are chances are of success:
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.
The setup leading to today’s Follow-Through Day:
Day one (5/25): SP 500 closes higher with big intraday reversal. Other indexes put in new lows but have big intraday reversals allowing indexes to reset their previous day one attempts from two days ago. The SPX being higher and the intraday reversal on the other indexes put all indexes under day one of a rally attempt.
5/26: day two of rally attempt. As long as the LOD of the rally attempt (5/25) is not breached the rally attempt is good.
5/27: strong day but volume was lower thus not a FTD on the indexes PLUS you can not have a FTD just two days after the rally attempt starts. The proper follow through days happen 3-6 days after the attempt but can be as far as 20 days away as long as the LOD of the rally attempt (5/25) is not breached. However, anything past day 10 has a MUCH higher chance of failure. The best happen on day 4-7.
5/28: day four of rally attempt and the rally attempt is still alive
6/1: day five of rally attempt and it is still alive.
6/2: nasdaq rallies 2.6% on higher volume thus confirming an uptrend with a FTD on day six of the rally attempt. However, this FTD is not the best because all the other indexes are still showing LOWER highs than on day three of the rally attempt and many indexes are still below the 200 dma. The best FTD in my study have come with indexes above the 200 dma (and the best come with indexes retaking the 50 dma on the FTD) and making higher highs and lows from the rally attempt to the FTD.
Overall, the chances that this follow-through day will succeed is very slim and nobody should be surprised if the rally attempt fails. If leading stocks with strong fundamentals start setting up in sound patterns and breakout then we could succeed but most leading stocks have been hit hard and we will need a whole new group of leaders or for the old names to heal before we see much headway.
I hope this explanation helps. 🙂
