I had a reader email me today and ask how to count distribution days. As I write this, the current distribution count stands at two on the NASDAQ and one each on the S&P 500 and the Dow Jones Industrial Average. If you are not sure what I'm talking about, you might want to check out my post called What Is A Distribution Day? Just to summarize again though, a distribution day is when a market index closes lower on higher volume and is indicative of institutional selling.
Take today for example, the NASDAQ closed lower on higher volume and added to the count by one. The other indexes all closed lower on lower volume and therefore didn't rack up a distribution day.
There are a few important things to remember when counting distribution days.
- When the count reaches four to five distribution days in a two week period, the market uptrend will change to market uptrend under pressure.
- The count of distribution days is dynamic and they can be erased based on time and distance. First time. After a couple of weeks, they are immaterial. Also, the index can erase a distribution day if it climbs high enough to make it irrelevant. Personally, I don't know what the exact rule is. I just pay attention to the big picture column each day.
- If the index only loses less then .2 percent on the day, it doesn't count as a distribution day.
As you start to study the overall market direction and the indexes, take the time to watch the IBD TV market wrap and to read the Big Picture column. What I like to do as part of my stock market investing daily routine is review the indexes myself first and then see what the IBD says to confirm if I analyzed it correctly.
In time, you'll learn that counting distribution days is really easy with the help of the IBD.
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