Stocks: Buy low, sell high…But when to buy, exactly?

Down markets may give you the urge to purchase stocks.  Drops mean the stocks are on sale, so it’s time to buy—right?  See how experts read the tea leaves and know when to buy stocks again after a drop in prices:

They look for a follow-through day.  A follow through day shows that a new upward trend is establishing itself after a downward pattern (a “correction”) has been occurring.  It tells you the bottom has hit, and now things are trending upward again.

How can you identify a follow-through day?  Watch a major index, such as the Nasdaq Composite or the S&P 500.  If, after a new low, or “bottom”, you notice a day when the index closes higher, this may mean that things will begin to rebound.

One upward day isn’t enough, however, to see if things have really changed.  Call it the “attempted rally”, and write down the date when this began.   The index may drop again, but it must stay above the “bottom” which you noticed.  

Now comes the follow-through day:  This means a big gain in rising volume; at least one index must close  up 1.25% or higher in volume heavier than the previous day.  

But how many days after the “attempted rally” will the “follow-through day” occur?  It will occur four days or later after the attempted rally.  (Sooner than that means it’s too early to verify a proper rebound.)

So are follow-through days surefire?  No.  Roughly 25% to 30% of follow-through days fail, and the market will return downward to its correction.

Don’t go crazy buying.  Because of this risk of failure, buy stocks gradually when a follow-through day happens.  (Also watch to see if the publication “Market Pulse” announces a shift from “Market in correction” to “Confirmed uptrend”.)  

Be ready.  The stocks that will gain the most tend to rise right at the beginning of a rebound.  Frequently this occurs within two to three weeks following the follow-through day—but a price run-up can occur on the follow-through day itself !  

Do you really want to invest your time and effort?  While most of us don’t want to spend the time and effort watching the market this closely, it’s good to know what our fund managers are up to.  (We hope ! )

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