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How to Track Weakness in the Market: Distribution Days

Posted Date: March 20 2021
We all know the significance of market status in determining an investor’s stance in the CANSLIM style. It not only helps you realize gains by being aggressive when the risk is low but also protects you from unwarranted risks in markets.

When the market is in a Confirmed Uptrend, it is the best time to make the most out of your investment. This is when most breakouts are successful, and hence an investor carefully following the patterns of his/her stocks makes big gains. But how can you pre-empt a probable weakness in the market so that one can lock-in gains and play defensive with less or no exposure? A distribution day can provide a systematic and credible approach to do that.

What is a Distribution Day?

A distribution day is when a market representative index (for example, Nifty50) loses more than 0.2% in a day, with volume higher than that of the previous session. When a distribution day occurs, it hints that big institutional investors are exiting or reducing their positions in the market. Institutional activity is what moves any market, especially in India where retail participation is small.

How Does it Help in Sensing Market Weakness?

An investor keeps count of all valid distribution days during a Confirmed Uptrend. Successive distribution days imply a weakening market. But what threshold of distribution day count is enough to say the market is under pressure? A distribution day count of 2–3 is benign and usually normal in a Confirmed Uptrend. But when the count increases to 5–6, one should prepare to get his/her positions trimmed.

Distribution Day Expiry

Though a distribution day hints at institutions liquidating their positions, it loses its impact after 25 trading sessions. A distribution day is also removed from the count after the index rallies 5% above that day’s close.

Current Market Status:

- We downgraded the market status to an Uptend Under Pressure on Wednesday as distribution day counts were elevated. Nifty breached its 21-DMA on Monday, briefly undercutting its 50-DMA. Currently, the distribution day count stands at six.

- We will change the status to a Downtrend, if one more distribution day is added or if Nifty fails to reclaim its 50-DMA and market leaders show signs of deterioration in their price actions.

- Investors should consider booking profits in the stocks that have performed well and have advanced 20–25% from their ideal buy points. Even if the market undergoes a small correction, these stocks are more likely to consolidate and test their moving averages. Further, stocks slipping below their 50- and 200-DMA on above average volume should be sold. Consider exiting stocks that have declined 8% from your buy price.


Related: 

How Relative Strength Rating Helps You Pick Outstanding Growth Stocks

Overhead Supply Can Repulse A Stock’s Climb

What’s A Distribution Day And Why Does It Matter Amid The New Stock Market Rally?

Distribution Day, Follow-Through Day, & the Market Cycles


Read our last week’s article:Missed IPO is Not a Missed Opportunity

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