It is difficult to identify the start of a major stock market uptrend if you are relying on headlines and news. By the time, reporters figure out what’s going on in the stock market, the best part is over.
At MarketSmith India, we have a defined set of rules to identify the upturn in the market. It will remove any personal judgment.
It relies on a follow-through day, a device identified by historical research.
Follow-through day occurs if a benchmark index (Nifty in our case) delivers a strong gain in volume higher than the previous session. That big gain on rising volume is considered as a follow-through day, which confirms that a new uptrend is underway.
We changed the market status to a Rally Attempt as last Friday was a blue rally day (Day 1) and Nifty managed to stay above its Day 1 low for two consecutive sessions. We wait for a follow-through day to occur to confirm the uptrend as most of the major rallies in the market start with a follow-through day.
A follow-through day can’t pick the exact day when a market bottoms, but can get you close to the bottom. The most powerful follow-throughs usually occur between the fourth and the seventh day of an attempted rally.
There will be cases in which confirmed rallies fail. A few large institutional investors, who have large funds, can run up the market on a particular day and create an impression of a follow-through. Hence, follow-through day should be used in conjunction with other indicators to provide firm evidence. One of the other indicators is simply to check if there are fundamentally good stocks breaking out of sound bases.
A follow-through signal doesn’t mean investors should go and buy with abandon. It just gives you a go-ahead to choose high-quality stocks with strong sales and EPS growth as they break out of their bases.
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