We all know the significance of market status in determining an investor’s stance in the CANSLIM style. It not only helps one realize gains by being aggressive when the risk is low, but also protects from unwarranted risks in markets.
When the market is in a Confirmed Uptrend, it is the best time to make the most out of an investment. This is when most breakouts are successful. Hence, investors carefully following the patterns of their stocks can gain big. But how can one pre-empt a probable weakness in the market so as to lock-in gains and play a defensive stance with little or no exposure? A distribution day can provide a systematic and credible approach to do just that.
A distribution day is when a market representative index (for example, the Nifty50) loses more than 0.2% in a trading session, 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 Sense 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 would be indicative enough to say the market is under pressure? A distribution day count of 3–4 is benign and normal in a Confirmed Uptrend. But when this count increases to 6–7, one should prepare to trim positions.
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
- Currently, the distribution day count stands at five. One D-day has been added today and one expired. Another D-day expires Monday.
- We have not changed the market status to Under Pressure as Nifty is trading above its 50-DMA.
- We will change the status to an Uptrend Under pressure if the index adds one more distribution day or if Nifty breaches its 50-DMA and market leaders show signs of deterioration in their price actions.
- Investors should consider booking profits in 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. Furthermore, stocks slipping below their 50- and 200-DMA on above average volume should be sold. Consider exiting stocks that have declined 8% from their buy price.
What do you think? Please email us any questions or comments.
Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.