Friday, December 5, 2008

Using IBD's 'follow through day'

How the FTD has fared in the recent volatile market.

Previously they said that 1 in 5 follow through days failed. But in recent week's choppy markets, it has failed more. From "The Big Picture" (12-2-2008):

"Lately, we've seen a higher failure rate. The S&P 500 has nabbed three follow-throughs in recent months: Sept. 25, Oct. 16 and Oct. 28. Each time, the benchmark index has failed to build on that gain, reversing and falling to lower lows. Follow-throughs in other indexes have also failed. " [Note: From memory, one of these FTDs were undercut the day immediately after with a savage 8% loss on high volume. The others were undercut in a matter of days.]

Calling a market rally or correction is an exercise in trend following. The FTD is just one of their tools to give an earlier signal. If there ever was an indicator designed to give false signals in a volatile market, the FTD - occuring on an daily increase on higher volume than the previous day - would be it. IBD has always stressed not just to jump in and buy just because of the FTD, but to take it as a signal to keep a watch on leading stocks to buy at the aporopriate breakout point.

A reminder that the FTD by itself is not enough to confirm a uptrend:

  • it must also be conformed by the action of leading stocks (a form of market depth)
  • and from recent experience, should also be confirmed by further price/volume action of the indexes ie: up days in higher volume, down days in lower volume.
  • and may also be cofirmed by the markets reaction to news (ignoring bad news)
And always cut loss if it dosen't work out.