The biggest challenge in the market lately has been the inconsistency of the action. Since the top in the Nasdaq on February 16, there have been four big bounces. Each bounce was followed by intense selling the next day.
The bounce today is even stronger than the prior ones, but the more important question is whether this is a change in the pattern, or will the indices roll over again? Bonds are suggesting maybe this is a low, but the charts are still murky.
The most important technical issue at this point is that the indices hold above recent lows. If they do hold, then the next thing we want to watch for is a 'follow-through' day. William J. O'Neil of Investors Business Daily fame looked for a follow-through day after an index has held the lows for between four and seven days. If there is then a strong gain of 1% or more on above-average volume, that is called a 'follow-through' and will generally mark a major change in market trend.
It is important to note that there is a waiting period for a technical 'follow-through.'
The follow-through concept works well but can cause frustration when there is a sudden V-shaped bounce and no retests of lows that hold. The straight-up move requires chasing, but if you are using the follow-through method, then you are going to miss out on some early gains that can be quite sizable.
The follow-through method can be used with individual stocks as well as with indices. For example, one of my core favorites in the cannabis sector is Village Farms (VFF) . The stock closed positive yesterday, which would be day one of a potential follow-through. It needs to stay above the $13 level on a closing basis now and needs a big gain on higher volume this coming Friday or early next week to deliver a classic follow-through which would suggest more upside.
VFF is now back over its 50-day simple moving average, so it has support but can it regain the stock momentum it had several weeks ago?
The overall action is quite good today, but we have another quick downside reversal it is going to take a toll on sentiment. The market still has some major technical issues, but action like today is a good start for a change in character.
