It is difficult to identify the start of a major stock market uptrend if you rely only on headlines and news. By the time reporters figure out what’s going on in the stock market, the best part would be over.
At MarketSmith India, we have a defined set of rules to identify the upturn in the market to remove any personal judgment.
We rely on a follow-through day (FTD), a device identified by historical research. Follow-through day occurs if a benchmark index (Nifty in our case) gains strongly on volume higher than the previous session.
It confirms that a new uptrend is underway.
We changed the market status to a Rally Attempt (on June 21) as the Nifty50 managed to stay above its day one low for two consecutive sessions. On July 18, the index closed 1.43% higher on volume higher than the previous session.
We considered it an FTD and changed the market status to a Confirmed Uptrend. Since then, the index has rallied more than 8%.
A follow-through day cannot signal the exact day when a market bottoms out but can get you close to the bottom. The most powerful follow-throughs usually occur between the fourth and the seventh day of an attempted rally.
There will be cases in which confirmed rallies fail. Few large institutional investors with large funds can run up the market on a particular day and create an impression of a follow-through.
Hence, a follow-through day should be assessed with other indicators to provide firm evidence. Another way of confirming the market uptrend is checking if there are fundamentally good stocks breaking out of sound bases.
A follow-through signal does not mean investors should go and buy without caution. 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.
(The author is Head of Research – Equity, William O’Neil India)
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times.)
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