The Rules: Rule Number One

My investing style requires that I precisely follow a set of rules derived from William O'Neill's IBD methodology.

Rule Number One: Determine market direction.

In my case, I only take long positions. Most of my capital is sitting in tax-qualified accounts, so I can't go short on equities, although I am willing to buy puts or sell calls. For this reason, I look for markets that are trending up or sideways. For a market to qualify as trending up (confirmed rally), it must close "up" three days in a row on rising volume. Thereafter, it remains in a rally until it suffers four distribution days in which it closes "down" on volume higher than the six week average daily volume. These distribution days do not have to be consecutive days, but they normally have to occur inside an eight week window.