The Official Advocate for Personal Investing
Originally published JULY 2010. SFO magazine.
TECHNICAL STRATEGY
New Uptrend Detects Winners
By Kate Stalter
In every new market uptrend, a fresh crop of innovative, young companies emerge as leaders. After the
major indexes clawed out from the bear market in
March 2009, early gainers included Apple, Priceline.
com, Green Mountain Coffee Roasters and Baidu.
These stocks—and many others—went on to become some of the market’s biggest leaders during
the next 12 months. What else do those companies
have in common? Each went public sometime in
1999 or later.
NEW NAMES
New innovators, not the more mature companies,
are typically the names that show the most explosive earnings and sales growth in a new cycle. That,
in turn, spurs price increases.
This leadership from the innovators has been
evident in every market uptrend since the 1880s.
RESEARCH SHOWS
Notice something important about the growth of
these winners? These big gainers also launched
strong runups in spring 2009, when the market itself
was also turning higher.
Investor’s Business Daily’s research has shown that
three-fourths of stocks follow the market’s direction.
So it stands to reason that the best time for buying
stocks is during a market uptrend. (See just a few of
the stocks that began big rallies after the market went
into a confirmed uptrend March 12, 2009.)
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CONFIRMATION
So after the market has been in a downturn, how
can you tell for sure whether a new uptrend has
been confirmed?
A proven way of making that call is with the follow
through day. That is a day when at least one of the
major indexes—Dow Jones Industrial Average, S&P
500, NYSE Composite or NASDAQ—notches a significant percentage gain. Volume must be heavier
than the previous session.
Look at Figure 1, a chart of the NASDAQ from
summer 2006.
CHART ANALYSIS
• Point 1: On July 18, the index fell to a new low,
and then began rallying higher. That was day No.
1 of a rally attempt.
• Point 2: The next session brought a big price gain
in heavier volume. But that was too early to be a
follow through day. The follow through generally
happens after day No. 4 of the rally attempt. That
is because false signals can occur in the early
days of a rally. It is common to see huge buying
immediately after fresh lows. But if it is too soon,
the index often falls again, reaching another low.
• Point 3: On Aug. 15, the NASDAQ climbed 2.2 percent in heavier volume than the prior session. That
follow through came 21 days after the rally attempt
began. This may seem like a long time to wait, but
it is a perfectly acceptable span according to IBD.
Three-fourths of stocks follow the market’s
direction, so the best time for buying stocks
is during a market uptrend.
Figure 1
NASDAQ in 2006
Nasdaq Composite - 2006
Index
Index
Scale
Scale
2500
2,500
2,400
2400
2300
2,300
2
2200
2,200
3
2100
2,100
RS
2
3
2000
2,000
1
Volume (00)
10,200,000
5,000,000
2,400,000
24
7
April
21
5
May
19
2
June
16
30
14
July
28
11
August
25
6
8
22
20
September October
3
17
November
1
15
December
29
12
January
26
9
23
9
February
March
23
Source: Daily Graphs Online
That particular follow through resulted in a
successful market uptrend, which lasted until
February 2007.
BE ALERT
A caveat: About 25 percent of follow through days
fizzle, so be especially alert for selloffs in the early
days after a new uptrend is confirmed. If the uptrend is fragile, you will generally see heavy selling
within just a few sessions.
Every new bull market since the 1880s has started with a follow through. It is absolutely necessary
to see heavy volume buying to confirm an uptrend.
In the days and weeks immediately after the follow
through, you will see the strongest stocks—those
young innovators—begin their big price moves.
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WORDS OF WISDOM
It is worth considering a few words from IBD
founder William O’Neil in his book How to Make
Money in Stocks.
“A follow-through [sic] signal doesn’t mean you
should rush out and buy with abandon. It just gives
you the go-ahead to begin buying high-quality
stocks with strong sales and earnings as they
break out of sound price bases. ... Remember, no
new bull market has ever started without a strong
price and volume follow-through confirmation. It
pays to wait and listen to the market.”
Kate Stalter is a market writer and commentator at Investor’s Business Daily and Investors.com. She hosts
the daily Market Wrap video at Investors.com. Click
for a two-week free trial to Investor’s Business Daily.
Get more at SFOMAG.COM
• Read “Early Winners in 2006”
• Watch an IBD video on how to spot a
new uptrend. (It begins after a short
commercial.)