Market Under Pressure

Today we experienced distribution on the NYSE indices (S&P500, Dow, NYSE Composite). Distribution is defined as a drop in price on volume higher than the day before. Distribution is caused by money leaving the market. IBD typically rules out slight distribution where the price change is less than a 0.2% drop. We had a large drop today on higher volume.

Billy posted something earlier in the day about a distribution warning with the correct conclusion, distribution that follows on the heels of a follow-through day most often (80%) leads to a failed rally. IBD is aware of these statistics and put the market status as Market Under Pressure.

Waiting for leading stocks to set up proper bases is needed. At that time a follow-through day could possibly lead to a successful rally. There is little doubt that this could happen in the weeks ahead and possibly lead to a workable rally through the end of the year. I would still call this a bear market rally but some of them work and should be played.

I remain in cash in the CANSLIM portfolio. I own GLD and DGP, two positions I rotated out of at the top and reentered this morning sidestepping the drawdown. I paid attention to English Bob's post showing that Gold may have bounced off of its Midas support line.

Now that's a trade!

Mike,
Would you agree that yesterday's distribution was dubious due to the volume distortion from BAC?
BAC , a single-digit stock, was UP on 602,000,000 shares or 352,000,000 shares above average.
Without BAC that was UP, the volume would not have been higher for SP-500 and NYSE.
Volume ended lower on the NASDAQ.
Shouldn't the IBD's FTD failure statistics be revised in this context?
Billy

Billy,
I do suspect the distribution call based on the distortion that BAC volume caused.
We can take distortion analysis too far but this was limited to a single stock and therefore we should at least question the call and the conclusion. The lack of good base setups is still there, this is enough to keep me out of CANSLIM picks. The lack of leading stocks in position to breakout from sound bases still makes the rally failure prone. However nothing says we can't go up 10% in rapid order and then fail.

So I break the caution into two pieces one for medium term investors which I believe the caution flag is out and one for short term investors which may have a green flag.