Peak Signals: Spotting A Stock's Direction With This Key Market Signal

2/22/24: This video on categorizing rallies will be appealing to a number of people.

Eric Krull, co-author of “The Lifecycle Trade,” joins Investor’s Business Daily’s “Investing with IBD” podcast to discuss climax signals, sell switches, and spotting “Mount Everests” in today’s markets. Krull also discusses strong signals and sell switches in Nvidia (NVDA) stock, ARM (ARM), and SMCI (SMCI).

Peak Signals: Spotting A Stock’s Direction With This Key Market Signal - Video - IBD (investors.com)

Here is a brief summary, but the video has a number of useful graphics you will probably want to see. This is for the longer term traders, not you swingers.

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• About 33% of follow through days produce rallies where you can make money
• An additional 41% will produce rallies with Small Losses Or Gains (SLOGs) and give enough time to make a safe exit
• Conclusion: Follow through days are a good buy signal, but money management is key.

• Transcript Notes:
• It looks like 74% will make money, but the lesson learned is to not invest too much money in at the start of a rally.
• Like IBD says, start with a couple of stocks and see how they do.
• In some following slides, you will see some other signals to help.
• The first 3 days are important because if you see professional distribution on day 1,2, or 3, that is a yellow flag and rally will rarely be good. If 2 of first 3 days is distribution, there has never been a “Life Changer” rally after that.
• The first 25 days are also important, you want to see some subsequent FTDs, as major rallies average 2 to 3 subsequent FTDs and about 8 accumulation days.

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So how do you know professional distribution?

Andy

How To Spot Major Stock Market Tops: Track This Action | Investor’s Business Daily (investors.com)

A distribution day is a significant decline in the Nasdaq or S&P 500 in higher volume than was seen in the previous session. IBD defines a “significant decline” as a drop of more than 0.2%, with no rounding up.

A distribution day indicates unusually heavy selling by institutional investors, the heavyweights who largely set a market’s direction.

Four or five distribution days over several weeks nearly always signal that stocks have topped and are heading for a downturn. That’s similar to how persistent headaches, coughs and sneezes suggest that you ought to call in sick and break out the chicken soup.

IBD’s research has determined that investors shouldn’t count distribution days after 25 trading days have passed. At that point, those days of liquidation have become irrelevant.

A distribution day also falls out of an index’s count after the index climbs 5% above that distribution day’s close. IBD has developed this rule on the premise that when an index rallies and extends itself from a distribution day, it’s showing the strength to overcome high-volume selling.

Keep in mind that some drops in higher volume don’t carry as much weight.

Distribution days in this camp include those that come after a holiday, leading to an easy volume comparison. Plus, watch for those sessions on Wall Street where turnover is boosted by heavy options-expiration trading. Options-expiration days fall on the third Friday of every month. If that Friday is a holiday, expirations move to Thursday.

It’s still a distribution day even if turnover comparisons are distorted by a holiday or expirations. But such a day isn’t as significant as a sharp drop in higher trade without any distortions. The Big Picture column will note these nuances.

Keep in mind that you can have four different scenarios when it comes to determining what this means for the stock market going forward. Namely:
• High quantity of distribution, severe intensity of selling in each bout of distribution
• Low quantity of distribution, severe intensity
• High quantity of distribution, moderate to mild intensity
• Low quantity of distribution, moderate to mild intensity

@buynholdisdead

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Thanks Pete. That is very helpful.

Andy