Percent Drop: 3%
Volume Increase: 1%
The Distribution indicator allows us to scan the entire market looking for shares that are presenting themselves as possible short selling opportunities or a potential put warrant or option trades. The theory is that as a share reaches a level at which the stock is going to find resistance, we can see the large players or smart money moving out of the stock. “High volume high price equals Educated Sellers and Uneducated buyers”.
Trend following system
All equities, not options
The three variables with this indicator are as follows;
this is the number of days to be included in the search from the date the search was initiated. Smaller settings will more likely result in more aggressive selections (particularly in smaller capped stocks) while the larger settings tend to bring up the more conservative selections.
This is the measure of volume increase needed to meet with the requirements to highlight the stock. The increase in volume must be over a number of days so the indicator is not simply activated by a single day spike.
This is the increase in price required to signal the share as an opportunity. A percentage rise setting of 3% would mean an increase of at least this amount is required.
The diagram below shows the pattern the indicator is looking:
As you can see in the figure above, the indicator has signalled a share that has moved above a level of resistance with increasing volume. The indicator is looking for the smart sellers beginning to exit the share ahead of the general market being aware of the impending downturn. As we can see, the share has continued to increase before we see the real reversal. Once the shares with the required patterns are found the other parameters are calculated. If the share meets all requirements we are alerted to it.
The indicator is an alert to potential opportunities; however, we need to wait for confirmation that the shares are actually going through a reversal and not a continuation. The chart below shows the type of opportunities the Distribution indicator is looking for.
On the chart we can see the level of resistance the indicator has identified (the blue line) and the share has moved up through it on reasonable volume. We can also see how the share continued to move up for several days before turning down. After the alert came up there was five days before we saw the stock turn back down (Note. This period will vary).
On the chart below see can how we would have used the chart and the information provided to trade the stock.
Looking at the longer-term position of the share we can see according to the Turning Point Indicator (see Turning Point Indicator) the share is approaching a price that has provided significant support and, most recently, resistance. (Note as well the accuracy of the previous three Distribution indications).
Once we have an appreciation for where the share price is in relation to the chart, look for the actual entry signs. Below you can see that waiting for the lower high gives us an indication of the reversal in the trend.
The green arrow indicates where the share has made a lower high and we have a more definite indication of the impending reversal.
If the indicator appears a multiple of times it does not mean the stock is likely to run further than if only one indicator was present, but it is a fair indication that the share may be approaching a level of resistance as the same settings are working over several days. It may be coming into a time of stability or Distribution. It is still imperative that you narrow the actual entry using further analysis.
In summary, the Distribution Indicator is one that alerts us to potential opportunities in the market over several time periods.
The indicator may appear to have a weakness in that it can alert us long before the share exhibits the characteristics of a trade, but it was designed to be pre-emptive so that we can be ready when the big players start to play.