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Investor's Business Daily
All Major Bull Rallies Begin With A Follow-Through Day
Tuesday July 27, 7:00 pm ET
Jonah Keri

You hear it so much, it's almost become the naysayer's mantra: "You can't time the market."

Short and punchy? Sure. And also completely false.

The market's price-and-volume action gives clear signs of the market's direction. A follow-through day gives you the biggest of head starts -- timing the market's bottom.

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A follow-through occurs at the earliest stages of a fledgling rally. After a significant market correction, the market will look to regain its footing. Any up day then counts as Day 1 of an attempted rally.

The next two sessions, Days 2 and 3, don't need to show much in the way of gains. As long as they don't undercut Day 1's low, the rally remains intact.

For a follow-through to occur, you want it to land between Day 4 and Day 7 of the attempted rally. On any one of those days, you're looking for one or more of the major indexes -- the Nasdaq, S&P 500 or Dow -- to rise 1.7% or more in higher volume than the previous day.

Though a follow-through in that span gives the strongest signal for a new rally, one that hits anywhere between Day 4 and Day 10 can work. Follow-throughs that occur after Day 10 yield lower success rates.

Though this method may seem esoteric at first, keep in mind it has decades of IBD research behind it.

To gear up for the next follow-through, study charts of past market bottoms. The Nasdaq flashed a follow-through in October 1998 which kicked off the final, furious stretch that carried stocks to huge gains.

Just remember: Not every follow-through triggers a huge, new bull market. But no raging bull has ever started without one.

After three years of harrowing losses, investors were starved for good news by the time March 2003 rolled around. On March 12 of that year, the Nasdaq fell to a low of 1253.21 before bouncing back for a 0.6% gain in swift volume (point 1). That was Day 1.

The Nasdaq roared ahead 4.8% in massive trade the next day (point 2). Exciting action? Sure. But you still wanted to wait for Day 4-7 to confirm the new rally.

On March 17, the follow-through hit on Day 4. The Nasdaq jumped 3.9% in sharply higher turnover (point 3). Volume was also above average. Though the index stumbled a bit on March 31 (point 4) and a few other times shortly after the follow-through, it never approached its prior lows. The Nasdaq would go on to gain 72% to its January 2004 peak.

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