Glossary
Follow-Through Day
A follow-through day is identified when a major index (Sensex or Nifty 50) closes significantly higher, over 1.5% for the day, on higher volume than the previous session. It happens on fourth day or later of an attempted rally. The most powerful follow-through days often happen on fourth through seventh day of an attempted rally. They serve as a confirmation that the market has really changed direction and is in a new uptrend. The strength in a follow-through day can be gauged by the action in leading stocks. A follow-through day coupled with leading stocks breaking out from their base patterns provides signs of a sustainable rally. A follow-through day is a key concept in the market-timing system developed by MarketSmith founder, William J. O’Neil.
A Distribution Day
A distribution day is indicated by a major market index such as the Sensex closing down 0.2% or more on higher volume than the previous day. Distribution in the stock market refers to the increased selling of stock by large institutions. The number of distribution days on the Sensex helps us in tracking the general market condition. Our studies have shown that four to six days of distribution over a period of five weeks are often enough to turn a previously advancing market into decline. Once you notice increasing distribution, it is best to hold off on any further stock purchases, and perhaps even cut back on some of your positions, especially if you are on margin.
A Confirmed Uptrend
A Confirmed Uptrend market status indicates the Nifty is in an uptrend. The uptrend begins with a follow-through day or when the index reclaims its previous uptrend high. At this stage, the index is not showing signs of significant distribution or heavy selling by institutional investors. This is the perfect time to be looking out for fundamentally strong stocks at proper buy points.
An Uptrend
An Uptrend Under Pressure market status is normally associated with rising number of distribution days on the Nifty. The index has 3-4 distribution days in the last five weeks and is showing some signs of deterioration. The index may be close to its 50-day and/or 200-day moving average support level, but is typically above at least one of the levels. Investors need to exercise caution and keep their buying decisions reserved to fundamentally strong stocks showing technical strength.
Correction
A major index generally goes into Correction when the number of distribution days in the last five weeks rises to 5-6. The index has typically declined 5-7% or more from its recent high. Also, the index most likely breaches its support levels of 50-day and 200-day moving averages. Investors should avoid new purchases, get off margin, and raise cash. This is a good time to build your watch list of fundamentally-strong stocks that you would like to own when market condition improves.
A Rally Attempt
A Rally Attempt begins the third day the index closes higher off the most recent bottom after being in a Correction. During a Rally Attempt, we are on the lookout for aFollow-Through Day to confirm the trend has reversed and we have entered a Confirmed Uptrend. A Rally Attempt fails and the index goes back into a Correction if it undercuts the low made on the first day of the Rally Attempt.
A stock chart pattern
A stock chart pattern discovered by MarketSmith founder William J. O’Neil, this pattern on a high-low-close bar chart looks like a cup with a handle when the outline of a cup is viewed from the side.