Wednesday, July 23, 2008

Quick Note On Follow Through Day

Investors Business Daily did not declare Tuesday a Follow Through Day. It did qualify under the original 1% rules, though. I conducted most of my studies using the old 1% rules. One primary reason is that moving the requiremnt to a 1.7% move, several large rallies would have been missed. There are a couple of things to note when the market puts in an “Original Follow Through Day” (OFTD) like today. First, based on the 64 OFTD’s I found in my study between 1971 and January of 2008, the expectation over the next week was positive. Second, however the market moved over course of the next week was a predictor of the success or failure of the FTD about 2/3 of the time. You may refer here for more details on these statistics.

8 comments:

Johan Lindén said...

I thought that the FTD was a sell signal according to your stats. A majority of the FTD has failed after coming from a +12% decline. True or false?

Mac said...

I can't tell for sure, because I can't get accurate volume figures, but the Russell 2000 has followed-through based on yesterday's action on the fifth day of its rally attempt - up 2.75% yesterday. I am surprised IBD didn't mention anything because normally, they say if one index follows-through, it means the whole market did. Again, maybe the volume wasn't higher on the small caps for them to count it as a FTD.

Anonymous said...

I guess CBI is pretty much is in "short the market" territory?

Rob Hanna said...

Johan,

Yes. They have failed more often than not after a 12% + decline. This doesn't necessarily make them a sell signal, though. Potential rewards are many times significantly larger than the risks.

In either case, I personally would consider them reliable enough in either direction to trade the index based on a "FTD System"

Rob Hanna said...

Mac -

Good observation. Thanks.

Anon - The CBI doesn't have a "short" signal. Either long or neutral.

Rob Hanna said...

Johan,

by "many times significantly larger" I meant to say "often significantly larger". Sounded confusing when I just read it.

Rob

Tim said...

Wondering if some of Lowry's research (90% up days) can help determine which FTD's will be successful.

Rob Hanna said...

Tim,

The short answer is no.

The long answer was published in the July 27th Weekly Research Letter. Send me your email and I'll send you the Letter.

Rob