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The Nasdaq Composite followed through on the 16th day of a rally attempt,
closing up 2.3 percent on greater volume then yesterday. This technically puts
the market in a new confirmed uptrend…but with warts.
While all bull markets have begun with a follow-through day, not every
follow-through day has led to a bull market. While historically 70-80 percent of
them have worked, this one does not smell right. Successful follow-through days
are usually accompanied by sound institutional quality stocks breaking out of
constructive bases. Clearly, there is a lack of breakouts…but on that front,
there is a clear lack of bases. My other problem is that while volume on the
NASDAQ was higher than the day before, it was only about 1% better…and still
below average. I have always thought a follow through day should have the feel
of an explosive move. This was not explosive. I also make note that none of the
other major indexes staged a follow-through day.
The market now has at least a chance to move higher here out of the bear
market. If this is meaningful, more and more leadership will indeed show up. So
you do not have to go out and just buy with abandon. I am cautious. If I do
buying, I will probe and then add if things start to work. Just keep in mind
that during the last bear, several of these follow-throughs crapped out. I will
know this one fails by seeing distribution in the next several days. Normally a
follow through will fail in the first three days by showing distribution.
FSLR led the day off its earnings gap. It did not look back…but a study of
FSLR shows the correction was more than normal…but admittedly, FSLR had a
large move so a larger than normal correction may have been necessary. There are
several others I am watching…but the names are not plentiful.
I will take my time for good reason. This is a market that has screwed with
everyone. If this is the end of the bear market, there will be plenty of time
for stocks to set up and be bought out of sound bases. And if this is just
another countertrend rally and false follow-through day, distribution will show
up, and we will know shortly.
Lastly, a little quote out of O’Neil about failed follow through days:
“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 identified 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 doesnÃ¢â”