What Is A Follow-Through Day?

IBD’s vocabulary can be difficult for the rookie investor to grasp. One term that comes up fairly regularly is “follow-through day.”

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What is a follow-through day? First, a little background.

The start of a major stock market uptrend is difficult to identify 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.

IBD’s method of determining an upturn in the market doesn’t rely on personal judgment.

It relies on a follow-through day, a device identified by historical research.

Finding The Stock Market Bottom Objectively

The follow-through day requires a set of converging factors.

How does it work?

During a market correction, the investor first looks for an attempted rally. Day 1 of an attempted rally begins when a major index closes up from the previous session. Neither volume nor the size of the gain matters. The only thing that matters is that the attempted rally stays alive.

For the attempted rally to stay alive, the index cannot undercut the low of Day 1.

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What’s A Follow-Through Day? It Confirms An Uptrend

On Day 4 or later of the attempted rally, the Nasdaq or S&P 500 must deliver a strong gain in volume up from the previous day. That big gain in rising volume is the follow-through day, which confirms that a new uptrend is underway.

A follow-through day can’t pick the exact day that a market bottoms, but it can get you in close to the bottom.

Go back in history, and you will find a follow-through day early in every major market uptrend.

Teddy’s Bear Market, Then The Stock Market Bottom

In September 1901, Teddy Roosevelt became president after the assassination of President William McKinley.

Roosevelt’s words and actions soon frightened the business world. His administration launched the first of many antitrust suits in February 1902. And in August of that year, Roosevelt gave a speech in which he asserted that corporations were “creatures of the state” and that the government has “the right to control them.”

The next month, the U.S. economy fell into a recession.

The stock market had been falling for four months when the recession started. By November 1903, the Dow Jones industrial average marked a low that was 40% lower than it was the day Roosevelt took office.

Bad times, though, always end. The stock market often anticipates the end.

The recession ended in August 1904 (1).

But the follow-through day, signaling a new uptrend, came on Dec. 2, 1903 — Day 16 of an attempted rally (2). Volume grew that day and for the week. (The accompanying chart is a weekly chart, not a daily, to show the price-and-volume action more clearly.)

The Dow rose 59% in the next 12 months.

The 2020 Follow-Through

More recently, the S&P 500 made a follow-through on April 2, 2020. The index surged 2.3% in higher volume, eight sessions into a rally attempt that started the day after the index bottomed on March 23. A few days later, the Nasdaq made its own follow-through.

A version of this article first appeared in IBD on June 30, 2014.  Please follow Chung on Twitter at @SaitoChung.

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