The NASDAQ ($COMPQ) has registered 6 distribution days in less than a month and the DOW ($INDU) has flashed 5 distributions days during the same period of time. The NASDAQ has gapped below its 50-d moving average (MA) while the DOW is hanging on to this shorter term support line. Both indices are still above their longer term support, the 200-d moving average, so a trend reversal hasn’t confirmed yet.
However, this clear distribution is giving us a message. What is that message?
Well, just as follow-through days signal the potential start of a new rally (uptrend), five or more distribution days within a few weeks (on above average volume) is starting to hint the rally is coming to an end.
It’s clear that the uptrend has halted its continuous trek to new highs while the odds favor that the market is heading towards a correction.
So, what do you do?
Immediately assess each of you individual holdings and start to lock in gains on stocks churning (no longer making new highs). You don’t have to sell the entire position but it may be a good idea to scale back and definitely get off margin if you are employing leverage.
As mentioned in a previous post, Market Reversal? View the NH-NL Ratio, the NH-NL ratio is the strongest secondary indicator on the market for a major trend reversal. The NYSE registered its first negative reading since November 16, 2010. The NASDAQ has registered its first multi-day negative readings since November 16-17, 2010. The overall 10-day MA differential for both indices is still positive but a move to negative territory will be the major confirmation.
Price and volume tips you off as the main indicator while the NH-NL ratio confirms the longer term trend reversal.
If following items confirm, I highly suggest that you move to cash and avoid the risk of losing recent gains or start to show a loss.
- 5 or More distribution days on multiple indices within a few weeks
- Index price moves below the major moving averages (50-d and 200-d MA)
- New High – New Low 10-d MA Diff turns negative
- And most important: your individual holdings are making lower lows and lower highs while slicing major moving averages
Nothing is guaranteed in the market but when distribution days pile up (in a short period of time), it’s time to take notice, lock in gains and look to move to cash if all support and confirmation indicators confirm.
Let’s keep an eye on the NASDAQ, DOW and NH-NL ratio.
Do you consider “distribution days” to be those with higher volume than previous day, and closing down?
those long candle down are not distribution days- they are actually accumulation days by the people who control every move of the stock market- all you have to do is look at the spy buy and sell volume each day- look at 3-10-2011
go to wsj.com click markets then market data, then usa, then selling on strength and buying on weakness- the spy was buy on big weaklness on 3-10 and selling on strength on 3-11
Mark,
Yes, the general definition is a down day on volume larger than the previous day.
lerogee,
I don’t agree and to clarify, I am using the CANSLIM definition of distribution.
Some stats to consider on the 10th:
NYSE advancers to decliners: 487 to 2,557
NASDAQ advancers to decliners: 384 to 2,279
We have only had one day with more decliners on the NASDAQ over the past 6 months (I didn’t look further). And the NYSE decliners makes the top 4 over the past 6 months.
Other confirmations with adv-dec volume for each day that you mention support distribution per the “definition”.
We’ll just have to disagree on this one.
Chris, good post and I agree. However I suspect we may see some more upside surge to punish early shorts who have gone short during this 15-day consolidation. I’d look for the shakeout to complete before shorting the major indices. Any traders who shorted the initial 50 day MA break have already been punished. The question is will the whipsaw against the shorts continue? A scale-in tactic might be prudent here.
Alex,
Agree – I am not talking shorting at all – we are still above the 200-d MA. Now is just the time to watch you current gains and be ready to lock them in. A correction doesn’t necessarily mean that we have a full trend reversal (yet).
Chris,
thank you for the update and timely warning. Question about the pinnacle data service. Do all the values get updated daily or you simply pull them once a month?
Thank you