Follow-Through Day concept developed by William O’Neil of Investors Business Daily

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The Follow-Through Day is a concept developed by William O’Neil of Investors Business Daily, and explained here by IBD.com:

From the beginning of any attempted rally during a definite downtrend, a ‘follow-through’ day is identified when the index closes up 1.7% or more for the day on a significant increase in volume from the day before. The first two or three days of a rally are normally disregarded as it has not yet proven it will succeed and ‘follow-through’ with power and conviction. ‘Follow-through’ days therefore generally occur the fourth through seventh day of the attempted rally. They serve as a confirmation that the market has really changed direction and is in a new uptrend

The follow-through day doesn’t always predict a new rally, it only predicts a new rally 1/3 of the time. However, no rally has ever occurred without one, which makes this method one of the best in calling a new market rally. The most recent bull market started in March of 2009 with a follow-through day, and I recall some traders questioning IBD’s labeling of the follow-through day at the time, but it proved correct.

The Follow-Through day provides a green light to start looking for and buying stocks as they break out of sound bases. New leaders should emerge first.