O'Neil Follow-Through Day
Identifying Potential Market Uptrends
What Is a Follow-Through Day?
A Follow-Through Day (FTD) is a market-timing concept developed by William J. O'Neil, founder of Investor's Business Daily (IBD), as part of his CAN SLIM strategy, to identify a potential shift in the general market from a definite downtrend to a new uptrend.
Leading up to a follow-through day, a rally attempt begins during a downtrend when a major index posts a gain. The rally attempt remains intact as long as the index does not make a new low.
An FTD occurs during a market correction when a major index closes significantly higher than the previous day on higher volume. It occurs on Day 4 or later of an attempted rally.
According to William O'Neil's research, no bull market has begun without a follow-through day (FTD). Get an alert when an FTD occurs.
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S&P 500 (SPX) - Price & Volume Analysis
S&P 500 price action with volume analysis.Green shading: Day 1 to Follow-Through Day (valid FTD)Pink shading: Day 1 to rally failure
Dow Jones Industrial Average (DJIA) - Price & Volume Analysis
DJIA price action with volume analysis.Green shading: Day 1 to Follow-Through Day (valid FTD)Pink shading: Day 1 to rally failure
NASDAQ Composite (IXIC) - Price & Volume Analysis
NASDAQ price action with volume analysis.Green shading: Day 1 to Follow-Through Day (valid FTD)Pink shading: Day 1 to rally failure
Purpose
The FTD aims to identify potential shifts in market direction from a downtrend to a new uptrend, signaling the start of a possible bull market.
It helps investors distinguish between short-lived rallies and genuine market reversals with strong momentum, potentially backed by institutional investors.
Criteria for Identifying a Follow-Through Day
Timing
An FTD typically occurs on the 4th day or later (often between the 4th and 7th day) of an attempted rally following a market correction or downtrend.
Price Increase
A major stock index, such as the Nasdaq Composite or S&P 500, needs to show a significant price gain of at least 1.25% (or 1.5% - 2% in some interpretations).
Volume Increase
The trading volume on the FTD must be higher than the previous day's volume, ideally also above the average daily volume, suggesting strong buying interest from institutional investors.
Interpreting a Follow-Through Day
Confirmation of a Potential Uptrend
When the FTD criteria are met, it suggests that the attempted rally has real momentum and is more likely to develop into a sustained uptrend, signaling the potential end of a bear market.
Not a Guarantee
While an FTD is a valuable signal, it's not a foolproof guarantee of a new bull market, and the market can still reverse.
Requires Confirmation
Continued market strength and breakouts by leading stocks in the days and weeks following the FTD are important for further confirmation of the uptrend.
Importance of Volume
Strong volume on the FTD is crucial, as it indicates participation from major institutional investors, supporting the rally's strength.
Using Follow-Through Days in Investment Strategy
Increase Market Exposure
After a valid FTD, investors might consider gradually increasing their exposure to the stock market, focusing on leading stocks emerging from solid chart patterns.
Stock Selection
Concentrate on identifying and investing in fundamentally strong companies showing strong price action and breaking out of well-formed bases.
Risk Management
Even with an FTD, it's essential to practice disciplined risk management, including setting stop-loss orders to limit potential losses.
Limitations of Follow-Through Days
Potential for Failure
FTDs can fail, and the market may reverse despite the signal, highlighting the importance of ongoing market analysis and risk management.
Not a Standalone Indicator
An FTD should be used in conjunction with other market indicators and analysis techniques to assess overall market conditions and make informed investment decisions.
In conclusion, William O'Neil's Follow-Through Day is a valuable tool for identifying potential market uptrends and navigating market cycles. However, investors should use it as part of a comprehensive investment strategy, combining it with other analysis methods and practicing disciplined risk management.