It was pointed out to me that IBD declared Wednesday to be a Follow-Through-Day. Since it was only the 2nd day off the bottom this seemed odd to me. I’ve done an extensive series quantifying Follow-Through-Days. IBD’s rules have been fluid over time and sometimes nonsensical based on the evidence. From all appearances they have done very little actual research on their own indicator, and have never shared any verifiable results.
One basic guideline IBD has suggested with Follow-Through-Days is that they should occur between the 4th and 10th day of the beginning of a rally. I examined FTD’s after the 10th day in the February 29, 2008 blog post. At that time I found that FTD’s after day 10 are NOT less reliable as IBD claims. In fact, the small sample was much more reliable.
But what of FTD’s that occur prior to Day 4?
Using the original basic assumptions from the January 14, 2008 study I adjusted the requirement from 4 days (standard) to 2 days (Wednesday’s “FTD”). Below is a quick comparison since 1970. Again, refer to the original basic assumptions for definitions of success and failure of a FTD.
4th Day of Rally Is Earliest Possible FTD – 38 winners and 35 losers.
2nd Day of Rally Is Earliest Possible FTD – 39 winners and 43 losers.
So it appears that allowing FTD’s on day two did identify one additional rally. I looked to see when this additional “success” took place. It was July of 1973. The total rally only lasted 3 weeks. The reason it was “successful” if you entered on the FTD on the 2nd day off the bottom was that the “success” target of a move of twice the size of the distance from the bottom to the FTD was more easily achieved. This “successful” July rally never even went on to break the swing highs of May. Not exactly the kind of winner most traders would be disappointed to miss out on. And while it met the test definition, when looking at a chart it likely isn’t a rally that most traders would even consider successful. Also note that shortening the requirement to 2 days from 4 days triggers 8 more losers.
I don’t agree with many of IBD’s teachings on FTD’s, but in my eyes this particular rule (waiting until day 4) is a very good one. I personally wouldn’t ignore it and am a bit surprised that they did.