Here’s My Study On Distribution Days
The market moved up nicely again today. The long side
remains the place to be. The recent pullback was short and shallow, which is
what you like to see. I would continue to focus on breakouts as well as 1st
pullbacks.
I was inspired recently by an email that I received from a
TradingMarkets member to take a fresh look at one of the tools I use in
measuring the health of the market — institutional distribution.
Institutional distribution or selling can typical be seen
when the major indices fall on higher volume than the previous day. (High
volume reversal days that close only slightly higher would also qualify.) Most
technicians believe that during strong uptrends the market will normally not
undergo more than 2-3 days of distribution in a short period of time. When more
than a few days are seen clustered together then it can be a sign that the
uptrend may be nearing its end.
I’ve decided to take a look at distribution days,
specifically when clusters of them occur. Today I will lay out part of the
study for you and show you some charts that point out when clusters existed.
Over the next few weeks I will delve deeper into the subject in an attempt to
draw some more concrete conclusions about the usefulness of using distribution.
Below you will find 6 charts that show the S&P 500 over the
last 5+ years. I have identified days in which the market dropped on higher
volume with a small yellow dot. When clusters of yellow dots appear, I identify
that with a blue dot. In this case, anytime there were at least 4 distribution
days within the last 12 trading days you will see a big blue dot. (For
simplicity sake, I did not include high volume reversals in the study.) I also
show both the 50 and 200 day moving averages on the charts.
I will save detailed analysis for another day and just give
a few quick observations today.
1)
Distribution clusters appear near just about every major market top.
(One exception was Feb 2004 — if you consider that major — the subsequent
decline was relatively mild percentage-wise.)
2)
The reliability of these clusters is questionable, as they also sometimes
just act as a brief pause before the advance continues.
3)
During strong downtrends clusters are abundant.
As I said earlier, I will take this analysis further in
upcoming columns.
If anyone has Tradestation 8.0 Build 1869 or later and
would like me to email these ShowMe studies to them, just let me know.
Best of luck with your trading,
Rob