Is The Correction Over?

Is The Correction Over?

Question : When the market is in a correction, how do you know when it is time to buy stocks again?

Answer : Wait for a "follow through day"

What Is A Follow Through Day?

A follow through day indicate that a rally attempt have succeeded, and the market direction have changed from a "market in correction" to a "market in uptrend".

Investor’s Business Daily’s "Follow-Through Day Pattern," as described by its former chairman and founder, William O’Neil, in his book, How to Make Money in Stocks, is widely known as a pattern that identifies market bottoms.

Spotting A Follow Through Day

When the market is in correction and move into a new low, look for the first day where the market close up from the previous day. This is day 1 of the rally attempt. As long as the index is above the previous low, the attempted rally is in place.

The Day 1 low becomes the line in the sand; a violation of that low invalidates the pattern. Days 2 and 3 do not have to be positive days, but they cannot be less than the Day 1 low value.

Look for a major move on the 4th day of the pattern, which is call a follow-through day.

Summarizing the rules:

Day 1: Once a low has been established (after a correction), Day 1 occurs if the close is near the high of that day or a higher close occurs on the day after the low.

Day 2: The price must remain above the established low. If the price moves below the Day 1 low, then the pattern has been invalidated.

Day 3: The price must remain above the established low. If the price moves below the Day 1 low, then the pattern has been invalidated.

Days 4 - 7: Follow-through day must occur, with a gain greater than 1.7%, heavier volume than the previous day and heavier volume than average.

Follow Through Day In Chart 

Let's take a look at our own KLCI chart ..

Based on the KLCI chart, Day 1 rally attempt was on Oct 17th, last Friday (the best time to buy for the very brave!) when the index made a correction low but closed at the high. Day 2 was higher, Day 3 closed lower and Day 4 + Day 5 (today) close higher. 

It seems the market direction has changed from "market in correction" to "market in uptrend". As long as the index does not violate the Day 1 low, the uptrend remains intact ? Let's see the coming days ahead ..

GA

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