IBD Market School

Investing Strategies Technical Trader's Sanctuary
1

IBD had a project they called Market School. Mike Webster, Justin Neilson and Charles Harris did deep dives into the markets over time and tried to come up with black and white rules to help them judge the market without emotion.

As I come across mentions of the rules I will post them here.

A while back I posted on the Recommend Exposure Level here…
IBD Market Exposure Recommendation - Investing Strategies / Technical Trader’s Sanctuary - Motley Fool Community

Home study Kit Covers: $750
• 10 new buy signals that will get you into a market rally early.
• 14 new sell signals that reduce your market exposure before a downtrend.
• New portfolio management rules to keep you in-line with the market trend.
• Complete Market Simulation - We will do a complete simulation over an entire market cycle (bottom to top) using these new signals to scale you in and out of the market.

Instant Online Access covers:
• Follow-Through Days
• Buy and Sell Signals
○ Follow-Through Days and Failed Rally Attempts
○ 21-Day Moving Average
○ 50-Day Moving Average
○ Strength and Weakness
○ Downside Reversals
○ Distribution
• Investment Allocation Rules
○ Market Exposure
○ Buy Switch
○ Restraint Rule
○ Power-Trend
• Putting it all Together
• What if
• The Art

2

Living Above or Below the 21dma.

The market school research unearthed an important correlation to the 21dma.

In the Friday video of 11/29/24, Mike Webster said this…

Naz low has been above the 21dma for 5 days, as part of the “Market School” project, Mike, Justin and Charles Harris determined/decided that every time your low closes above the 21dma for 5 days and you close up for the day (the 5th day?) , then that is another “buy signal” (extra credit, gold star, etc)

They use that to counter act a distribution day. SPY is currently in same position and closed at a new high. Mike said “this would be a day you would be increasing exposure if you are not already up to your eyeballs in stock”

In the video of 1/12/25, Mike Webster mentioned this:
The inverse is also true. When your highs are below the 21dma for 5 days it is very significant, 10 days, very significant.

3

Going through the TOS program pseudocode and functional code I posted previously ( https://discussion.fool.com/t/thinkscript-for-ibd-stuff/111912/1 ), and some other sources, here is a list of the key initial buy signal days surrounding moving averages. Understand, they generated all this data and interpretation using indices (SPY and NASDAQ) NOT individual stocks. The “Buy” signals are signals generated by moves in the indices to initiate buys in final watchlist stocks you are wanting to buy. But the actual buy is only on stocks in the position of a buy zone for whatever system you use. A common comment on IBD Live is that if nothing on your watchlist is in a buy zone and yet the market is supporting getting back in, you can always pickup index etfs as a “functioning money holder” until something you are tracking goes into a buy position. There is a reason it is called “Market” school not “Stock” school. But it is very likely that this approach could be used on individual charts.

It is key to understand that they use Jesse Livermore’s scheme of pyramiding to enter and exit. What most technical traders just refer to as scaling-in and scaling-out. So, you determine your position size (total amount of money you want to invest in for a specific stock position). You don’t buy it all at once, you buy smaller amounts with each buy signal to that total. You can setup whatever you feel comfortable such as 5 buys of 20% or true pyramid such as 40%-30%-20%-10% or 30%-25%-20%-15%-10%. You flip the order to sell when you get sell signals. Once you are 100% bought, you are in, further buy signals are extraneous. And vice-versa.

There seems to be about 10-11 “Buy” signals (they label B1, B2 etc) and about 14-16 “Sell” signals (obviously S1, S2 etc). I’ve not worked out all the intricacies but since you brought up signals around moving averages, here are some signals based on that. I’ll use their names and you can google to get more details.

So envision a bear market or strong down trend, not too difficult today. You are looking for a sign of a change of course. The rally day is essentially a strong up day closing high in it’s range. It is NOT a buy signal. It is a marker of a potential change that must confirm, like all good patterns must. They also have “Pink Rally Day’s” that closes down but very high in it’s range. Once you have a rally day, you look for confirmation.

B1: “Follow through day.” Been discussed previously. Enter a position using your first scale level.

B2: “Additional follow-thru days.” Buys on the next FTDs within 25 days of the initial Rally day. In a steep climb, you could get fully in a position just on these

B3: “Low above 21ema.” Intraday low is >= 21 ema

B4: “Trending above the 21 ema.” Intraday low is above 21 ema for 5 consecutive days.

B5: “Living above 21 ema.” If it stays above 21 and each day is flat or higher (not low), buy every 5 days (from initial B3).

B6: “Low above 50 sma.” Remember, coming from a true downtrend, the ma’s are inverted and the 50 day is above the 21 day. It’s a buy signal when the low of the day is above or equal to the 50 sma.

Sell signals are essentially the reverse. Again, understand these are signals from typically the NASDAQ employed on individual stocks in your systems buy range.

Lakedog

4

Here is an example using the TOS charting program and using the IWM (only because that is what I was playing with when I went to look for an example).

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There are some aspects that need to be worked on and better understood, but this example I think illustrates the basic principles. Timing is the most confusing of the issues. They use time windows for many of the signals and it gets complicated.

**When they count the days for above the 21 ema, the first day (B3) seems to be truly day 1. So 5 days later should be B4, but in this case, I think there is both one of their complicators as well as a coding error. For the B4, down days are ignored in the counting, and since there are two, it should be day 7; however, the program counts it as day 6. I think it is a coding issue and only takes one down in consideration. Still trying to work that one out. Regardless, B5, or Living above the 21 ema is 10 days (apparently ignoring down days) and so is correct yet only 4 days not 5, away from B4. Just trying to write this makes me dizzy.

I did not label them, but on September 3rd is a break below the 21 ema or S5. Four days later, with the purple label is an S9 or break below the 50 sma. I need to dig back and check, but while buy days require the low >= moving average, it seems Sell days relative to the moving averages can just break it even if they start above. They must close <= ma.

Note on 9/10 there is also an S7 (Trending below 21) and then they list a start-over on 9/11 with a new rally day.

There is further details and caveats that make this somewhat confusing, which is why I prefer K.I.S.S. approaches, but new things are good to learn or try to understand.

Happy hunting,
Lakedog

5

Great job @Lakedog, got a lot of important indicators. I am not an expert, but I have been collecting mental and written notes for a while, so I will note some.

Here is a snippet from this:
Stock Market Bottoms: How To Spot Follow-Through Days | Investor’s Business Daily

Every great bull market in history has started with a rally attempt. But until the rally is confirmed with a strong price and volume follow-through day, all you have is an attempt.

What Is A Stock Market Follow-Through?
Following a significant market decline, an attempted stock market rally begins when a major index closes higher than the previous session. The percentage gain and volume do not matter at this point; we’re just looking for an up bar.

If the index closes lower (red) but in the upper half of its daily price range, this is also acceptable as the first day of a rally attempt. This is called a pink rally day, a reference to the color of down bars in IBD Charts and IBD MarketSurge.

Whether blue or pink, as long as the index does not undercut the low of the rally day, the rally attempt will stay alive. If it undercuts that low, the rally fails, and you will need to watch for the next one.

A follow-through signal can occur as early as the fourth day of a rally. Waiting these few extra days is crucial. Often you find that the stock market has not hit bottom. An index may even reverse higher the next day but this “strength” may be due to investors covering short positions.

The follow-through is when the index delivers a strong gain in volume greater than the previous session. The volume does not need to be above average, just above the prior day’s. The percentage gain required is usually 1%, although in more volatile stock markets a gain of 1.25% may be needed.

If your follow-through day meets these requirements, that’s your green light. However, most people forget that a green light does not mean “hit the gas.” A green light means, “if you can proceed safely, it’s now your turn.”

Don’t get fully invested on the very next stock you see. After a follow-through day, you can begin increasing your exposure with stocks coming out of sound chart bases.

From Stock Guide 2024Q1
• Always buy something on an FTD.
• FTD is a substantial jump (at least 1.25%) of Naz or S&P on higher volume than the day before on Day 4 or later of a rally attempt
• Not all FTDs work, but no bull market rally in history has ever started without one.
• The key with FTD is to be selective with your buying and start with smaller position sizes
• Find the strongest leaders, avoid the laggards.
• Start with leaders with proper setups, and if it works, put more money to work. That is, get confirmation your trades are working
• In the downtrend, maintain your watch list
• New leaders will often have RS lines near new highs and 90+RS
• The biggest money is made at the beginning of new uptrends when the future leaders take off and begin their ascents.

6

Got a reference off of Reddit from someone who has taken the Market School class that confirms the buying pyramid steps that IBD recommends are 30% - 25% - 20% - 15% - 10%. Which is interesting when you compare it the Market Exposure recommendations that you cited in your previous August post.

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Means you have to limit your number of initial full investments. If you have $100,000 to invest and want 10 stocks, you could only fully invest $3000 (initial entry) of 30% in 6 stocks to keep your overall exposure contained. Not a big deal, just noticing the offset targets.

I’d be inclined to “flip it” and go lower percent in all watchlist stocks to “fish” some. To each their own.

Lakedog

7

$3k x 6 = $18K, or 18% exposure.

Remember, the pryamiding numbers apply to a single stock and some of the numbers I have heard in their discussion are to start at 50%, then add 30%, then add 20% as the stock proves itself. This would typically all be withing the 5% buy range. These days, they do a lot of “early entries” before a breakout, but I can’t recall them saying if that would be a 50% buy-in or if they reduce it since it is early. I do believe that with an early position, they would have tighter stops. So, if you are buying when it pops above 50dma, then you would sell if it falls below. I have a bunch of old IBD podcasts loaded up and one happened to start up on me and Bill was saying most of your losses should be 3-4%, not the full 7-8%. That is, you should know early on that this stock is not acting like a winner.

What is the recommend exposure on an FTD? I looked at our recent FTD from 8/13/24. The Big Picture article for that day called an FTD and said 20-40% (It was 0-20% the day before). Two trading days later, on 8/15/24, they raised it to 40-60%

So, if you have $100k and the market has a great follow through day, then you can feel free to deploy $20-$40. If you are investing 30% on first buy, then you get all 10 first buys for $30k, right in the middle. If your first moves are 50%, then that is $5k and that is 4-8 positions. Pragmatically, you probably won’t have 4-10 positions that are breaking out on day one. Maybe you have 3 break-outs and you put the rest in TQQQ or just QQQ. Now, two days later you can up your exposure to $60k and add QQQ or add to your best breakouts. You can also sell your QQQ on day two to add more to the positions you bought on day 1.

I think that math is correct, let me know if my brain was not in full math mode.

8

Our math is the same and I wasn’t raising a real hard point, more general discussion. Was just pointing out the irony of the pyramid base tapering down and the exposure ruling expanding out. I already considered the likelihood of not as many of your positions being in a breakout.

However, it raises the question of how many positions is best. They tend to suggest around 10 (hence my example). But I work with the next 20 years of living expenses for my wife and myself. I am absolutely not comfortable with dividing that by 10. Way too much at risk in a single position. But, having 40-50 positions is equally dangerous. There is no absolute. Everyone needs to do what they feel comfortable handling. I tend to have 20-25 larger positions and another 10-20 much smaller “fishing” positions. Even Mike Webster states all the time that he enters a lot more smaller position, even calls it fishing. But this is why I am always playing with excel spreadsheets and am now learning python. That provides the same thing I am looking to Market School for, guardrails to help manage and keep risks in check.

Lakedog

9

Totally agree. The vast majority of my positions are long-term, not trading positions. I carved out a completely separate account at Fidelity for IBD trading and I run around 10 positions at time. Sometimes I use IBD rules to trade around a long-term Motley Fool position I acquired years ago. That occurs in the MF account holding that position.

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10

Decided to drop this post on this existing thread since it falls within this subject tagline and really doesn’t need a thread of it’s own.

Still curious about Market School and have been playing a bit with the TOS tool I posted on in another thread (Thinkscript for IBD stuff). It hit me that this may be a good time to maybe walk with the market to try and learn some more. ###Let me note, I am not endorsing or suggesting Market School is the right path for all. That’s why I’m trying to learn about it, I’m just too cheap to go buy it. Too much money for something I have my doubts about. But appreciate the perspective of trying to establish signals in the general market to help guide when/how much for active investments.###

We’re at a timely spot in the market to try and apply MS, what I know of it. Having had a significant decline and now a “Rally day” which is basically an up day in the market. They also list what’s called a “Pink Rally Day” which is one that closes down, but the close is in the upper 50% of the day’s range (even more potent if in the upper 80%). Since it is “Day 1” and yes, counting days is very important to the process, I’m going to try and follow along. Will try and post any time the status changes. If anyone who knows Market School cares to chime in, please, please do so.

A rally day is not actionable, no buy or sell signal, just a flag of possible change.

Next event day to watch for is the “Follow Through Day,” probably should be thought of as confirmation day of the trend change. It’s defined as when at least one of the major indexes makes a “large percent gain” with higher volume than the day prior. The percent gain has a criteria based on the volatility (defined as the average percentage gain of the prior 200 days). Roughly, you need a 1.0 to 1.25% percentage gain. Technically, it’s a moving target and given the last year or so, it’s currently thought of as a 1.25% close increase to trigger.

Key is that you don’t even count anything as a FTD until the 4th day after the Rally day, but that gets confusing since the rally day is day 1, so you look at days 5-8 and later. The first possible FTD with this potential rally is Thursday.

A FTD is a “Buy” day in their system. You pyramid in as discussed above. Remember, they are following NASDQ and SPX to generate the signals, but you act upon your watchlist stocks that are in a buy pattern or breakout. If nothing is, they suggest buy indexes. The key is exposure to an anticipated rally. Guess it’s the old saying that by the time you know you are in a rally or new uptrend, you’ve missed it.

Keep in mind, we have NOT had a complete reset of the markets based on their criteria and still are in an active situation with buy switch on and distribution days being kept. They still list an exposure level, so this exercise will not match what they post. It is to try and apply the rules for rally’s and subsequent signals. To see if they make some sense and better understand. The overlays on this system is part of the frustration for me.

Lakedog

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11

Close below the rally low. Reset.

12

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NASDAQ pierced the 200 today. 1800 level next “technical” area with fibonacci support, but personally, not sure I even have any faith in technical levels given the “external” influence with absolutely unpredictable events. Even the big boys have no way to predict nor time to bake in the effects to the market. Oh well, short plays, verticals and sector plays keeps things positive…for the moment.

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13

The day is only halfway done and it looks like this will be a Rally Day or a “Pink Rally Day” but we shall see. Posting because of another component is triggered today. At least my understanding of the rules.

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“Circuit Breaker” is a safety valve they use. Occurs if the index falls 10% from most recent high and falls 5% or more below the 50 sma intraday/OR index closes below 50 sma in lower half of the range or >1% below 50 sma. This occurrence from what I have seen, is based on range or intraday lows, not just close (please, if anyone knows differently, correct me).

The result triggers their Buy Switch to off regardless of count and shuts down any Power Trend. It’s a reset. Have to believe that any of you who subscribe and follow IBD market now have recommendation of 0% and no Buy or Power Trend signals.

Interesting in that we will see how the close goes, but this is likely a rally day regardless of shutting things down. Of interest, the candle wick pierced the 50% fibonacci line and the next support line at 18000.

SPX has not broken the 200 nor is it down 10%.

Lakedog

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Yesterday they came out with 0 to 20% exposure. Looks like a reversal today but job report on Friday.

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Shouldn’t have mentioned anything earlier, jinxed it. Closes were at or below 50% of the range for all indexes, so not even a “Pink Rally” to be had today. Although, NASDAQ squeaked above 50% by 12 points. But 12 points out of over 18,000 seems a bit thin for me to acknowledge it! O’Neil wanted closes above 80% to consider. I’m going with that.

VIX spiked thru 26 but relaxed to 23.5 at the close. CPCE is 0.64, still not pushing the 0.7-0.8 levels anticipated at turn-around/capitulation. But who knows after speeches tonight.

Lakedog

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Rally Day. IBD Live Webster this morning referred to yesterday as a Pink Rally Day. By every published criteria I have found, that at best is by the hair on my ar$. By their 50% criteria that they admit is somewhat random and meant to make it straight forward. Plus O’Neil cites 80% plus. Today is a Rally day by all criteria, but the next couple days may make the argument moot. Did some more searching and found a solid reference that cites day 4, so we are looking at Friday if you consider Tuesday as a Rally, and Monday if you cite today, as the earliest FTD’s. Spy is clearly in a Rally also today.

Lakedog

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The debate deepens. Today clearly undercut yesterday, the day I consider a Rally day by IBD criteria, but not Tuesday. Tuesday was Webby’s "Pink Rally "day. Tomorrow is the first possible FTD for his start. Will just follow.

I am impressed by the definition of support at 18000. Let’s hope it holds.

Lakedog

18

Yes, the S&P undercut its rally day, but the Naz barely avoided doing it. Either way, it would take a miracle for it not to be a poor FTD. IMHO.

19

Close doesn’t matter and both NASDAQ and SPX undercut already today, so rally reset but still possible to create Rally Day 1 if it closes above 50% of the range.

Trade carefully

Lakedog

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The nasdaq broke 18000 what are you thinking Lake. Do you trade Fibonacci levels?