Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market

9.3. THE GREAT BEAR OF 2001–2002

By September 2001 the market was rolling over again, and the second leg of the great post-bubble bear market of 2000–2002 set in with a vengeance. The general market and leading stocks broke down steadily through the last quarter of 2000 and the first quarter of 2001, until the market put in a follow-through day on March 27, 2000, as the daily chart of the Dow Jones Industrials in Figure 9.27 shows.

The March 27th follow-through came on the fourth day off the bottom, hence a "fourth-day follow-through," which is normally a sign of strength. The market, however, began to roll over again over the next few days, and began to break as volume picked up, marking an initial distribution day, which can normally signal an end to the rally attempt. However, the understanding of follow-through days is very subtle, and O'Neil would articulate certain ideas about how any follow-through, as well as the general price/volume action of the major market indexes, must be seen in the context of the overall market position within the bull/bear cycle. With respect to some of the weakness seen in April of 2001, he pointed out, "Generally, you should see, as the market is coming off a strong follow-through day and is rallying, what look like distribution days but are then followed by up days, so that the pattern of distribution days does not really build on weakness—it forms as a result of bearish psychology reacting to a rally in the market, and then the market shakes ...