Looking For A Follow Through Day

“Starting on the fourth day of the attempted rally, look for one of the major averages to ‘follow through’, meaning it shows a booming 2% or more gain on heavier volume than the day before.  This tells you the rally is much more likely to be real.  The most powerful follow throughs usually occur on the fourth to seventh days of the rally.”

– William O’Neil, Legendary Investor and Founder of Investor’s Business Daily, How To Make Money In Stocks (3rd Edition), pg. 65

“The specific parameters [of the follow through day] can be argued but the premise is that bottom fishing can occur at anytime, but true buying comes a bit after the lows as investors change their views.”

– Michael Kahn, in his “Getting Technical” column on Barron’s Online, “Bull Market or Just Bull?” (subscription required), Wednesday November 28

After last week’s rally, the question on investors mind is if it was for real.  In other words, was that just a temporary bounce or the beginning of a new rally?

One way to sort out the difference is to look for a “follow through day”, a term coined by William O’Neil, the legendary investor and founder of Investor’s Business Daily.

A follow through day shows a level of conviction after the frenzy of the initial move up.  Because it must take place 4 to 9 days after the first up day, it gives investors time to collect their thoughts and suggests their belief that the move was the beginning of a new up move rather than just a bounce.

Since last Tuesday was the first day of the attempted rally, Friday was the 4th and today (Monday) is the 5th.  What we need to see, then, according to this theory, is a strong rally on heavy volume this week (which constitute the 5th through 9th days of the attempted rally).

My guess is that if it’s going to come, it will come on the heels of a weak Jobs Report on Friday and the corresponding implication that the Fed will cut 50 next Tuesday.