Page 1054 - How to Make Money in Stocks Trilogy

Buying Checklist 41

1. New Low: When the market is in a downtrend, look for at least one of
the major indexes (S&P 500, Nasdaq, or Dow) to hit a new price low.
The Nasdaq did that on March 9, 2009 (Point 1 in the previous chart).
2. Attempted Rally: After hitting that new low, look for a day when the
index closes higher. That might mean the index has stopped its decline,
established a new “bottom,” and is on its way to a rebound.
The Nasdaq did that on March 10, when it made a nice gain on higher-
than-normal volume (Point 2). What does that above-average volume tell
you? That institutional investors are buying—a bullish sign. But one up
day isn’t enough to tell if the market trend has truly changed. So we
count that as Day 1 of an attempted rally.

3. Follow-Through Day: Once the attempted rally is under way, we start
looking for a follow-through day to confirm that a new uptrend has
begun. Here are the basic requirements:
• Typically occurs sometime after Day 3 of the attempted rally. Many
occur between Days 4–7, but they can come later. The March 12,
2009, follow-through actually occurred on Day 3, which is fairly rare
(Point 3).
• The index should make a big one-day price gain, typically 1.5% or
higher, on volume heavier than the prior day.

Get Back in Gradually After a Follow-Through Day
Not every follow-through day leads to a big, sustained uptrend. About one-
third will fail, and the market will quickly fall back into a correction. That’s
why you want to get back into the market gradually when a follow-through
day occurs and the Market Pulse shifts from “Market in correction” to
“Confirmed uptrend.”
If the uptrend takes hold and the leading CAN SLIM stocks start to move
higher on heavy buying by institutional investors, you can start to get in
more aggressively. If the uptrend fails, use the Selling Checklist and move
safely back to the sidelines.

What to Do When a New Uptrend Begins
See my 2-Minute Tip video on “What to Do After a Follow-Through Day” at
www.investors.com/GettingStartedBook.