William O’Neil, in “The Successful Investor”:
In any uptrend, there will come a point when selling activity overtakes buying. This we call distribution, and it’s important that you recognize it as it’s happening. The first day of distribution is when the index closes down from the day before but on volume that is higher.
No uptrending market, however, is turned down by just one day of increased volume selling. What we’ve found, by studying every market top going back 50 years, is that three to five days (in recent years it’s been five days) of volume distribution over a span of two to four weeks is sufficient to turn the market’s uptrend into a downtrend.
What you’re watching for, then, after an initial day of distribution, is a second, then a third, fourth, and fifth. After the first day, the market may go up for two or three days before you see a second day when the market closes down with volume picking up. Around the second or third day, you start to get suspicious. By then, you’ve witnessed more selling than you’d like to see and you may have already sold a stock or two. By the fifth day, you realize the probability is extremely high that the entire market’s rolling over and headed down.
We’ve seen six distribution days on the Nasdaq in the past four weeks. Something to consider as you make your investment decisions in the near future.
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