Wednesday, February 20, 2013

What Today's Major Distribution Day Means for $SPX

Down volume on the NYSE was over 90% of total volume today, an event known as a major distribution day (MDD). This is a measure of breadth; recall in the weekly market summary that breadth is second after trend in importance, so a MDD is of significance.

Today's MDD was the first since the mid-November low in $SPX. A few points:
  1. Yesterday, SPX formed a new high. Today, all those gains were given back on trading dominated by sellers. This, in the past, has been a bad combination. See the first chart below (red arrows). Selling momentum typically carries over into the following period. 
  2. Today's set up is eerily similar to April 2010 and February 2011. See the first two red arrows on the first chart: a long, grinding uptrend capped by a MDD. April 2010 double topped within a week; February 2011 began a multi-month topping process. Either one of these is a possibility.
  3. Not all MDD's are the same. After a downtrend, an MDD can mark the point of capitulation. See the second chart below (green arrows). This was the case at both the June and November lows in 2012. 
  4. Some MDDs are rogue and some come in clusters. See the red rectangles at the bottom of chart three. It should not be a big surprise that a cluster of MDDs will lead to a substantial decline in $SPX. We have to be on watch now for another day like today.
  5. Finally, today is day one of major selling in 2013, and its coming after a 7 week uptrend. Long uptrends like that, in the past, have not ended without at least a second attempt at the recent highs. Read further here and here

A MDD right after a fresh high (red arrows) has typically led to further selling going forward. Note the April 2010 and February 2011 tops in particular.

After a downtrend, an MDD can make the point of capitulation (green arrows). This was the case at both the June and November lows in 2012.

Going forward, be on the watch for a cluster of MDDs to signal a substantial decline in the indices.