How To Spot A Stock Market Bottom: This Signal Marks All Major Lows

A key IBD exchange phrase you may hear is “follow through day”. It is a critical point in the market cycle to identify the probable start of a new uptrend for the major indices.

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Big gains can be made after a stock market correction bottoms, reverses direction, and takes off. Big gains are usually made in the first year or two of a new bull market.

History tends to mimic the past and trends repeat themselves. Therefore, the follow-through is a signal to recognize as a potential entry point to get the story on your page.

What is a Stock Market Follow-Through?

A follow-through tag is a technical confirmation of a new uptrend typically seen in the Nasdaq or S&P 500. As investors use their chart reading, it removes the emotion and hope of a trend reversal.

Historically, all major market bottoms have had a follow-through. But not all follow-throughs result in new market uptrends. Some end up as false signals.

Look for a follow-through once price closes higher than the previous day on a depressed index. The clock starts on this day and counts as day 1 of a rally attempt. The volume or magnitude of the gain is not critical at this point. Day 1 can also be a day when the index falls but closes near the session high.

This is the time to wait and watch the index chart closely. In the following days, make sure the index stays above the day 1 low. If not, the rally attempt fails and the clock starts over.

Usually, a follow-up day occurs from day four through day seven of the attempted rally. Sometimes it can be weeks later.

Watch for the index to make a big gain – at least 1% and sometimes more – on larger volume than the previous day. A volume greater than the average daily volume is ideal.

Nasdaq had textbook follow-through

The Nasdaq Composite hit a low on March 12, 2003 (1). The Dow Jones Industrial Average and the S&P 500 Index also hit lows on the day.

Despite the new low, the Nasdaq closed 0.6% higher. This started the count for the rally attempt. It was trading at 12% higher volume than the previous day, although volume didn’t matter much at the time.

Note that on Day 2, the index surged higher on above-average daily volume and tested resistance at the 50-day moving average (2).

Day 3 closed slightly with above average daily volume. Day 4 followed as the Nasdaq rose 3.9% (3) in 35% higher volume, also above the daily average volume (4). The index rose above the 50-day and 200-day moving averages.

From there, the Nasdaq began its great run, peaking on January 26, 2004, up 79.1%.

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