Looking for the earliest indications that the stock market is about to venture into an uptrend? Look no further than the follow-through day.
But that first sign that buyers are coming back depends on confirmation from other signals. Strong follow-through days can lead to several breakouts among leading stocks. Meanwhile, major stock indexes like the Nasdaq and the S&P 500 start to rally, often when the rally is least expected and when the headlines are most negative.
The Nasdaq and the S&P 500 executed a follow-through day on April 22 – on the 11th day of their rally attempt. Gains of at least 2% in higher volume showed some conviction behind the buying.
There was merchandise to buy, also a good sign. Investor's Business Daily ratcheted up its market outlook to 20% – 40% exposure on April 24 and again to 40% – 60% exposure the next day.
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Leading Stocks Break Out After Follow-Through Day
Several leading stocks rallied on or around the latest follow-through day. Among IBD Leaderboard holdings, CrowdStrike gapped up above the 50-day moving average and broke out of a cup-with-handle base's buy point of 400.02. Netflix extended its post-earnings rally after breaking out at a buy point of 998.70 (see Point 1 in accompanying image). Aerospace and defense stock Loar also cleared a buy point of 90.79.
Elsewhere, IBD 50 stock Palantir cleared a buy point of 98.17. The software leader pulled back sharply to its 21-day line after reporting earnings, but it's holding support so far. Zscaler, meanwhile, cleared a buy point of 216.39.
At the index level, both the Nasdaq and the S&P 500 retook the 50 day moving average and have been able to hold above the level. Another point to note: As of Monday, neither index had added a single distribution day since the April 22 follow-through day. The S&P 500 added its first distribution day on Tuesday.
A distribution day is a significant drop of 0.2% or more for one or both indexes in higher volume than in the previous session.
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Meanwhile, more confirmation of the uptrend's strength was seen in the price action for the Nasdaq which pared losses and closed near session highs in the last three trading days in April. The big shakeout was on April 30, when the Nasdaq pulled back to its 50-day line. But the Nasdaq erased an intraday loss of 2.9% to nearly break even in another display of strong buying demand.
Stock Market: So What's Next?
After their impressive rally since the follow-through day, both the Nasdaq and the S&P 500 continue to show bullish price action. The S&P 500 suffered a mild distribution day Wednesday, falling 0.8% in higher volume. But that was followed by an up session in higher volume and close near session highs.
While the stock market uptrend still looks strong, signs of weakness could crop up in the form of increasing distribution days, although that's certainly not an issue at the moment.
Other signs of weakness to look would be if heavy volume selling starts to crop up in leading growth stocks. Or, if the stock market starts to show a tendency of strong opens followed by weak closes. That's often a sign that buying demand is drying up.
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