We all know the importance 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 minimal but also protects you from unwarranted risks of markets.
When the market is in a confirmed uptrend, it is the best time to make the most of your gains. This is when most breakouts are successful. 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 Distribution Day?
A distribution day is when a market representative index (for example, Nifty 50) loses more than 0.2 percent in a day, with the 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?
When the market is in a confirmed uptrend, the intensity of market weakness is determined by the distribution day count. 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 two–three is benign and usually normal in a Confirmed Uptrend. But, when the count increases to five–six, one should prepare to get his/her positions trimmed.