Tuesday, February 16, 2010

Follow Through Days Above vs. Below the 200ma

I discussed on Friday that Thursday’s action qualified as a follow through day (FTD) under Investors Business Daily’s classic definition in which a higher volume rise of 1% or more in one of the major indices is required. Apparently IBD didn’t count it since it didn’t quite meet their new 1.7% rise definition. I’m not a big fan of the new rule and believe the 1% requirement is more useful that the new 1.7%. For details on why I feel this way you may refer to this old blog post on the subject:


I thought it might be interesting to examine a few new ideas with regards to FTD’s today. Before I do that I’ll first point you to the post where I defined the rules of the tests. I basically followed all of the rules as IBD laid them out. Two rules that IBD has never clearly defined are what entails “success” or “failure”. I defined “failure” to be a close below the intraday low of the bottom prior to the FTD. I defined “success” as a move either 1) twice a large as the distance from the low of the potential bottom to the close of the FTD, or 2) a new 52-week high. More detailed explanations of the rules may be found using the link below:


Under these rules, and requiring an 8% pullback before looking for a FTD, there have now been 71 FTD’s since 1971. 37 have been “successes” and 34 have been “failures” for a winning % of 52%. One of the findings I published during the 2008 series on FTDs was that FTD’s coming after smaller pullback had a better success rate than FTD’s coming after larger pullbacks. It was this research that led me to ponder whether this FTD may have a better chance of success because the rally attempt is occurring while the SPX is above its 200ma. It would seem to make sense that there might be a better chance of success since the long-term uptrend has not clearly turned down at this point.

What I found when examining the 71 follow through days that now qualify based on the original study was that only 23 closed above the 200ma. Of those 23, 14 turned out to be winners and 9 losers. This 61% success rate is better than the 48% success rate that has occurred below the 200ma with 23 winners and 25 losers. It isn’t overwhelmingly better, though. I’m not sure the distinction is worth making.

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