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