As someone pointed out in the comments section today, Investors Business Daily finally declared a Follow Through Day (FTD) on Wednesday. Therefore, I thought I should post the next study in my series on Follow Through Days. When we first started I had planned on this being Part 4, but the study has evolved as the market moved in interesting ways. For those who missed the first several parts of the series, you may click here for the full shebang. This will be the 8th post on the subject. When I am finished I hope to have the most complete and accurate information available anywhere on Follow Through Days.

Today I will try and assert whether Follow Through Days are more reliable after small or large declines. As you may recall, in the standard test I set up initially, I chose a decline of 8% to be required before a FTD would be looked for. To my knowledge, how deep or long a decline must be before someone can begin looking for a FTD has never clearly been defined. In September of 2005 IBD suggested that FTD’s can be useful even after pullbacks as small as 5%. I decided to look at how FTD’s performed after pullbacks of varying degrees of market declines. Below are the results from December of 1971 through today. Success parameters are laid out exactly as they were in Part 1.

After a decline of 5% or more – 115 FTD’s, 63.5% successful.
After a decline of 8% or more – 64 FTD’s, 54.7% successful.**
After a decline of 10% or more – 48 FTD’s, 48% successful.
After a decline of 12% or more – 36 FTD’s, 44.4% successful.

Generally, the deeper the decline, the less likely it is that a FTD is going to be successful. It is reasonable that more serious selloffs have more difficulty reversing. It is a bit disappointing though that a tool which is billed to signal the end of a market decline seems to fair worse when it’s needed most.

** This was the base test looked at previously.

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