Investor's Business Daily method for calling market turns

Investor's Business Daily has a well defined method for calling turns in market. It is based on research. It has a sound logic behind it. Plus if you are regular and careful reader of IBD, the Big Picture offers you a running commentary on market action.

The IBD method for calling market turns is based on behavior of big institutions. It uses price and volume as a proxy to gauge the behavior of big institutions. It defines follow through day as a day on which there was 1% rise in a major index on higher volume than the prior day.In recent book this has been updated to 1.7% or more.

Every new uptrend starts the same way: a big gain in the market on higher volume than the prior day, occurring after the third day from the moment that at least one major index starts coming off its lows.

That's known as a follow-through, and it has confirmed every new bull phase in the stock market. The most recent time we saw this occur was Aug. 29, when the Nasdaq surged 2.5% on slightly higher volume than the prior day.

Since then, the market has acted exactly like a new uptrend should.

To be sure, the market wasn't exactly ablaze in the days right after the follow-through. The indexes were sluggish and few stocks broke out in the early part of September.

But on Sept. 18, the market got a big shot in the arm, as the Fed cut interest rates by 50 basis points. The indexes rallied fervently on strong volume.

So when the market starts going down , IBD system first looks for a attempted rally which is defines as a day which ends higher than previous day. After such day it looks for a 1% plus day on high volume. Such a follow through day should occur within 4 to 10 days of attempted rally day.

In recent market turn , it called 29 th August as major bottom and start of a new rally phase. Since then it has been pounding the table saying , it is time to buy, it is time to buy stocks with best fundamentals. It has been constantly telling new leaders break out in first 4-13 weeks of start of new bull market.

There are many other tools I am aware of which give you similar kind of working methods to call market turns. All these methods are reactive, they react and interpret market behavior and form a opinion on next likely direction. You can research them on past data to see how they have behaved. As a trader or investor that kind of methodical approach gives you a distinct edge over no methods and experts subjective and unproven predictions like market is going to go down 50% this year or any other number or we don't understand why this market is going up.

As I have said before methods trump markets. If one is focused on making money and wants to seriously and aggressively make money, one can develop ones own method to predict market turns. If you read William O'Neil bio, he researched and came up with his own method based on some of the information commonly available. The only difference between him and many others is he is a methodical, research oriented person, who measured everything, formed hypothesis and came out with workable solutions.

Now contrast that to Barron's, have you ever seen a rally which it liked. Week after week it is, we don't understand why this market is rallying, speculators are going wild, there is need for new calculator, and so on. In the absence of methodology it just dishes out well written poetic stuff, which appeals to certain section of wall street. It is not a publication at its current form designed for active traders or even for investors.

If you are active and aggressive trader, you should constantly look for methodologies as against opinionated bearishness or bullishness. You may not exactly follow that method, but you can use that as a template to develop your own method. If you have method, and follow it regularly profit is an outcome.