We wait for a follow-through day (FTD) to confirm the uptrend, as most major rallies in the market start with a FTD. The start of a major stock market uptrend is difficult to identify if you rely on headlines and news. The best part is over by the time reporters figure out what's going on in the stock market.
At MarketSmith India, we have a defined set of rules to identify the upturn in the market; this removes any personal bias.
It relies on a follow-through day (FTD), a device identified by historical research.
FTD occurs if a benchmark index (Nifty in our case) delivers a strong gain on volume higher than the previous session. That big gain in rising volume is FTD, which confirms that a new uptrend is underway.
A follow-through day can't pick the exact day that the market bottoms out, but it can get you close to the bottom. The most powerful follow-throughs usually occur on the fourth to the seventh day of the 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, FTD should be used with other indicators to provide firm evidence. One of the other indicators is to check if fundamentally good stocks are breaking out of sound bases.
A follow-through signal doesn’t mean investors should go and buy with abandon. It just gives you the go-ahead to choose high-quality stocks with strong sales and EPS growth as they break out of their bases.
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