Market Roars Higher, but Traders Need to Be Selective

by Darrin Donnelly on October 31, 2011

Click on chart to enlarge.

Last Thursday, we finally got the big Follow-Through Day (FTD) we’d been hoping for since this rally began on October 4th.

The NASDAQ led the market higher with a 3.3% gain on heavy volume on Thursday.

Volume was not only increased compared to the Wednesday session, but it was well above average and the highest it had been in weeks.  This price-volume action left no doubt that the big institutional funds were participating in the rally.

The powerful Thursday session “officially” shifted us from a Neutral Trend to an Uptrend.

The glaring red flag is that this FTD on the NASDAQ comes nearly one month into the rally.  The most reliable FTDs occur four to seven days into a new rally.

When a FTD occurs this late, you want to exercise caution because it may be occurring right when the market needs a rest.

Indeed, the NASDAQ is up an amazing 19% since the October 4th bottom was put in.  That’s an incredible leap and common sense tells us that this market probably needs to catch its breath soon.

Still, leading stocks are acting very well.

Last week, we saw excellent follow-up action for stocks that broke out.  Adding to gains or pulling back slightly on much lighter volume is exactly what you want to see happen following a proper breakout.

The key right now is to be very selective with the stocks you consider.  Stick with only the best of the best in terms of both fundamentals AND technicals.

If your watchlist includes more than a handful of stocks, your search is too broad and you’re not focusing on the true leaders.

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