William O'Neil India
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.
At MarketSmith India, we have a defined set of rules to identify the upturn in the market, this will remove any personal judgement. 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 in volumes higher than the previous session. That big gain in rising volume is FTD, which confirms that a new uptrend is underway.
Currently, we are in a Rally Attempt as the Nifty was able to hold above its Day 1 low of 10,813 for the next two consecutive days. We wait for an FTD to occur to confirm the uptrend as most major rallies in the market start with an FTD.
An FTD cannot pick the exact day that the market bottoms, but it can get you in close to the bottom. The most powerful follow-throughs usually occur on the fourth to the seventh day of the attempted rally.
During September-October 2018, Nifty corrected around 15 percent. Most of the stocks declined during the period. On November 2, 2018, Nifty advanced over 1.6 percent on volume higher than the previous session, which qualified to be an FTD. Hence, we changed the market status to a Confirmed Uptrend.
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 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 does not 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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