Do you know Follow through Day?

2 Things Everyone Should Know About Follow-Through Days

Posted 06/10/2010 12:26 PM ET
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IBD\'s Kate Stalter discusses recent market swings, how you can handle them, and why the latest correction gives investors a second chance.


IBD: On Wednesday, June 2 we had a follow-through day, which changed the “Current Outlook” in The Big Picture from “Market in correction” to “Market in confirmed uptrend.” But then we quickly saw heavy selling, and the outlook went back to “Market in correction” on Tuesday, June 8. How should investors handle that kind of volatility?

Kate Stalter: Well, there’s no question these kinds of market swings can be frustrating. It’s easy to let emotions take over, but the market is telling you something significant at each juncture.

That’s why we constantly emphasize the need to follow buy and sell rules! When the market is this volatile, that’s when having good rules really pays off. They protect you from being too eager — and too fearful.

The follow-through day concept is a case in point. (Here\'s a video on follow-through days if you want to learn more.)

There are two things everyone should know about follow-through days…

First, not all follow-throughs work.

About 30% fail to create a sustained uptrend, and the market slips back fairly quickly into a correction. That’s what happened this week.

So based on that historical fact, use some caution. Get back into stocks gradually, making sure the market continues to go up. Also, you want to see leading stocks show strength before you commit more of your money. Investors who followed that rule over the last week most likely avoided any significant damage.

Second, no new uptrend has ever started without a follow-through day.

Even though some follow-throughs won\'t work, it\'s really important to remember: Every bull market since the 1880s has begun with a follow-through. Every single one. That\'s how crucial it is.

So when people ask how they should handle markets like the one we’re going through now, the answer is: Follow the rules! Wait for a follow-through before buying stocks again. And once you have a follow-through, get back in gradually, not all at once.


Ignore The News. Watch The Market.

IBD: We should also point out that follow-through days tend to occur when the news is awful. So it’s easy to miss the start of a new uptrend, or not believe it’s really happening, if you only let the news and your own emotions guide you.

KS: That’s right. And March 2009 was a great example of that. A lot of people missed out on great gains last year because they were focused on terrible economic news and the financial crisis instead of looking at what the market itself was actually doing.

When we had that the follow-through day in March 2009, no one knew if it would lead to a strong uptrend or just fizzle out.

For weeks and months, even experienced investors kept debating whether the rally was for real or not. Meanwhile, the market kept going up, and stocks like Green Mountain Coffee Roasters became huge winners! So investors who understood the indexes had followed through on the rally attempt were making money — while a lot of other people were sitting on their hands, and didn\'t take advantage of the opportunities right in front of them.


Not “IBD’s Rules.” Just How The Market Works.

There’s another thing we should note: There’s no IBD “secret sauce” or mystery to spotting a follow-through day and a new uptrend. It’s just history. We say often that it’s just how the market works, as we’ve learned by studying every market cycle since the 1880s. It’s really as straightforward as that: You can try to second-guess and outthink the market, or you can follow time-tested rules based on always-repeated market history.

I can say from personal experience that you will sleep better at night and do much better over the long term if you keep your emotions at bay and just stick to the rules!


Failed Follow-Through Gives Investors Second Chance

IBD: What’s the silver-lining we can take away from the market’s drop into a new correction?

KS: It gives investors a second chance to prepare for the next uptrend. If you didn’t build a watch list or if you didn’t pay attention to the market during the last correction, now’s your chance to do it right this time!

Read The Big Picture every day. Start tracking leading stocks that are setting up in bases. The big money is made in the early stages of a new uptrend, and the preparation you do right now will pay off big time when the market inevitably rebounds and starts a new run.
http://www.investors.com/MediaCenter/446177/200807291335/Market-Timing-How-To-Spot-A-New-Market-Uptrend.aspx