Wednesday, February 13, 2008

It is a Follow-Through Day

That according to IBD:

"Volume rose by less than 1% on the Nasdaq compared with Tuesday's level. NYSE volume eased 7%.

The Nasdaq's action met IBD's standards for a follow-through rally confirmation. A few rallies have started with only slightly higher volume on a follow-through. The August follow-through showed marginally higher trade. It triggered a lucrative rally, one that delivered big gains for many leading stocks."

They also emphasized that just because today was a follow-through day does not mean you should run out and just buy whatever you want tomorrow. They called the rally "fledgling" and pointed out there are still not a lot of top-rated stocks breaking out of bases. I have emphasized this the past few days.

So where do we go and what do we do from here? I am going to pay attention to the action the next few days and I think that will tell us a lot. If we get more breakouts along with no heavy-volume selling on the indexes, then I will feel much better about this potential rally. Some rallies do take longer to develop than others. Typically, however, if a few distribution days pop up right after a follow-through day, it will likely fail and the market is probably offering up some good shorting opportunities instead of good longs. I always remember this passage from O'Neil's book on shorting:

“You should be alert to follow-through days that occur without fundamentally sound stocks staging strong breakouts from sound base formations. Often a questionable follow-through can be indentified by a dearth of such breakouts which results in a noticeable lack of leadership. A sound follow-through day is generally accompanied by strong breakouts among a number of fundamentally sound stocks, so when this doesn’t happen, be alert to the possibility that the follow-through may likely fail.”

Bottom-line is we have to respect the action today that produced the follow-through, but it doesn't guarantee anything to us. We have had a few breakouts recently but not that many, and there weren't any fresh breakouts mentioned today in IBD (FSLR doesn't count). I really think the next two or three days will tell us what we need to know about this market's direction, at least I hope it will. It is much easier to make money going long in the market than going short, so I would love to see a legitimate rally, but I have my watchlists ready and am open for shorting or going long right now. Whichever one will work is the one I want. Good luck.

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