Follow through is important in so many areas of life. In sports, following through with your body helps achieve maximum performance. You can see this in tennis, golf, bowling, baseball – among many others. It’s also essential to good manners. My dad used to tell me to follow through with a handwritten note or phone call to show my thanks.
As traders, we look for stocks to follow through as confirmation that an established or new trend will continue onward. This requires time and patience, a virtue that many traders and investors seem to lack.
We tend to see only what we care to see in a chart, especially if we have a position working. But given the volatility in markets, we cannot afford to make too many mistakes. A stock can have a strong day, but without followthrough that momentum can quickly fizzle out.
Follow through in action
Boeing’s performance last week is a perfect case study in the importance of follow through. The company has struggled mightily to retain its stature after two plane crashes destroyed its reputation and the COVID-19 pandemic sidelined the airline for months.
On July 28, Boeing released some strong earnings and guidance. The stock gapped up sharply and sailed higher right into a resistance area (50 ma). From there, the stock fell and closed on its lows, though it was still up nicely for the day. The following day, Boeing did not have any follow through, and on Friday the stock was hammered with the market sell off.
The current chart shows Boeing being rejected at a key level, reversing lower and getting ready to test the 200 ma once again. Any bullish trader would be frustrated by this action. Waiting for that follow through would have spared you from wasting time, energy and, more importantly, your capital.
While a follow through day is not required to solidify a new trend, it certainly gives us more confidence that buyers are supporting the stock at certain levels. A rejection, such as we saw in Boeing, is good information, too: stay on the sidelines until the trend shifts from bear to bull.