12-1-2012 Comment

When I reviewed yesterday's action I thought the price bar on the NYSE Composite looked a bit like stalling. A stall day is a subtle form of distribution where the price makes little progress on higher volume. The simple form of stalling requires the closing range to be in the lower half of the bar. But when price makes a 7-day or longer high with volume higher than the day before and greater than average volume on a narrow range day that closes up less than 0.2% and between 65% and 80% of the range qualifies as stalling. This is a fairly arcane rule and IBD misses this from time to time. This gives us three distribution days on the NYSE Composite within five trading days. Clusters of distribution is not what we want to see, particularly on the index used to establish the follow-through day.

When I did an optimizatin study on distribution cluster rule S13, 4 out of 8 days distribution won out over 3 out of 5 days of distribution, but just barely. Reducing portfolio exposure on 3 out of 5 days of distribution makes more money than ignoring the situation.