Use Charts To Buy & Sell
Distribution Count Is Quick Take On Risk
By PAUL WHITFIELD, INVESTOR'S BUSINESS DAILYPosted 10/14/2009 05:34 PM ET
Tracking distribution days can help you get a grip on the market's current condition.
And the good news is this: It won't take much time.
The distribution day count is published every day in the Market Pulse on Page One.
An investor should watch the count, which can signal trouble.
A distribution day involves a significant decline in a major index in higher volume than the previous session's. It points to institutional selling. A handful of distribution days in a brief time can kill an uptrend.
Here are a few things to keep in mind about distribution days:
•The decline in a major index must be at least 0.2% — without rounding off — to constitute distribution. Anything less is too small to be relevant.
•When the distribution day count seems on the edge of a turning point, look at the leading stocks for confirmation.
If the IBD 100 is underperforming vis-a-vis the major indexes, that's a bad sign. Likewise when breakouts among top-rated stocks are failing, that too is a bad sign.
•Be aware that half trading sessions can set up a too-easy comparison. When the market resumes trade for a full session, volume will naturally be up.
•Holidays can also distort volume. Although such days might be included in the distribution day count, it doesn't mean as much.
•Options and futures expirations can boost trade, making comparisons harder to see.
These fall on the third Friday of every month, unless Friday is a holiday. In that situation, it moves to Thursday.
•Adistribution day is dropped from the count after 25 trading days have elapsed. The more distant a distribution day gets, the less relevant it is to the current market.
•A distribution day is dropped from the count after a significant percentage gain. The premise here is that when an index rallies and extends itself from a distribution day, it's shown strength to overcome the higher-volume selling.
The gain is measured from the closing price in the index to an intraday high. How big is a significant percentage gain? Usually 5%.
•A distribution day can sometimes occur on an up day.
When an index shows stalling action — a small percentage gain in fast trade — then it counts as a distribution day. The price spread on such days is typically long.
•Don't look for a distribution-day count during a correction. There's no sense in tracking topping signals when the market has already topped.
In those circumstances, you should be watching for a follow-through day, which confirms that a new uptrend is under way.
In October 2007, the Nasdaq began to show a number of distribution days over a brief period — never a good sign.
It notched five distribution days over a 16-session period 1.
Four sessions later, another distribution day changed the Market Pulse to "under pressure" 2.
The next day another distribution day kicked the Market Pulse into "correction" 3.
At that point, buys were off the table. Raising cash was the theme.
Of course, it's never as clear in real time as it is in hindsight.
There were follow-through days ahead that wouldn't work. That can happen, notably in bear markets.