One of the first things you want to learn how to spot is a distribution day in the stock market. The first place you want to look for distribution is in the general market indexes. A distribution day is when sellers outnumber buyers. You can tell when it happens when an index closes lower on higher volume than the previous day. While a distribution day is not ideal, one in and of itself is not a big deal as the market does need time to rest from time to time. But, stack 3 to 5 days on top of each other and then it puts pressure on the market uptrend. This is when you'll want to start looking for a correction.
In the chart at the right, you can see that the stock closed significantly lower the other day on higher volume. This is what distribution looks like. Sellers outnumber buyers and when that happens the price falls. Sometimes this selling comes out of the blue and this one caught me unaware because of a surprise earnings announcement from another stock in the sector. But if I'd been paying closer attention, I would have spotted distribution a few days before. You can learn more in my post called What Is A Distribution Day.
This is the kind of thing that you'll learn to spot as you gain more experience. And, while in general I might have spotted it sooner, I learned the lesson a lot better because I had established a position in the stock and the loss smarts, simulated or not.
This is also a reason that I think that everyone would benefit from practicing in my Buying Stocks - A Case Study challenge. You'll learn to spot this more when it happens to a stock that you are actively following.
I know that I did. I hope that chart helps you spot distribution in a stock. Good luck on your stock market investing program.
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