When the market is in a correction, how do you know when that trend has changed and it’s time to buy stocks again?
Wait for a “follow-through day.”
IBD’s ongoing study of every market cycle since 1880 has found that no bull market has ever started without a follow-through day. So instead of relying on hunches or predictions, wait for this time-tested signal to confirm the market has hit bottom and a new uptrend has begun.
What is a Follow-Through Day?
A follow-through day indicates a rally attempt has succeeded, and the market direction has changed from a correction into a confirmed uptrend. It tells you it’s time to start gradually buying stocks again.
Key Elements of a Follow-Through:
- New Low
- When the market is in a downtrend, look for at least one of the major indexes (mainly the S&P 500 or Nasdaq Composite) to hit a new price low.
- Attempted Rally
- After hitting a new low, look for a day when the index closes higher. That might mean the index has stopped its decline, established a new “bottom,” and is on its way to a rebound.
- But one up day isn’t enough to tell if the market trend has truly changed. So we count that as Day 1 of an attempted rally.
- From there, as long as the index stays above the previous low, the attempted rally remains in place.
- Follow-Through Day: Big Gain in Rising Volume
- A follow-through day indicates the attempted rally has succeeded.
- To count as a follow-through day, at least one major index needs to close up 1.25% or higher in volume heavier than the prior day. Volume does NOT have to be above average; just higher than the prior day.
- Follow-throughs typically occur anytime from Day 4 or later in the attempted rally. They can happen as early as Day 3, but the first three days are usually too soon to confirm a new uptrend.
Get Back in Gradually After a Follow-Through Day
Not every follow-through day leads to a big, sustained uptrend. About 25% – 30% will fail, and the market will quickly fall back into a correction. That’s why you want to get back into the market gradually when a follow-through day occurs and the Market Pulse shifts from “Market in correction” to “Confirmed uptrend.”
If the uptrend takes hold and leading CAN SLIM® stocks start to move higher on heavy buying by institutional investors, you can start to get in more aggressively. If the uptrend fails, follow your sell rules and move safely back to the sidelines.
Watch Out for Distribution Days
If you see distribution days within just a few days after the follow-through, look out! It could mean the nascent uptrend is not taking hold and will quickly fall back into a correction. Regularly check the Market Pulse for the current distribution day count and any alerts to changes in trend.
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The Big Money is Made in the Early Stages of New Uptrends
As noted earlier, the biggest winners tend to launch new price runs right at the beginning of a new uptrend.
It’s all part of the market cycle: During the prior correction, they form base patterns. Then they break out as the market direction changes, often on the actual follow-through day or within the next two — three weeks.
The examples below show how that same phenomenon happens year after year.
NEXT TOPIC: SHORT-TERM UPTRENDS AND INTERIM CORRECTIONS
View more information: https://www.investors.com/ibd-university/market-timing/market-bottoms/