As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%	Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%
Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

Bulkowski on Distribution Days

This article discusses distribution days, what they are and how they perform.

• Summary
• Background
• Methodology
• Methodology Example
• Results
• S&P Results
• See Also.

Distribution Day: Summary

A cluster of distribution days within 21 calendar days during a rising price trend is supposed to predict a price drop. It doesn't. Clusters of distribution days only work in a falling price trend, regardless of whether volume is heavy or light. This finding applies to individual stocks as well as the S&P 500 index.

Rob Hanna found the same thing. In his blog, he writes,

Needless to say these [Hanna's] results are horrible. It appears that following a bout of distribution is NOT a good time to be selling. ...Is this a new phenomenon? Did distribution day counting formerly work and in recent years it has failed? That might explain why IBD [Investor's Business Daily] has discussed it for so long. Sadly, no. While the results have been helped out by some horrible bear markets in the last decade, it's never been a winning concept.

Distribution Day: Background

A SFO magazine article in the May 2007 issue by Kate Stalter titled, Stock picking: the formula for success, prompted this research. She wrote,

Look for a day when an index sells off in heavier volume than in the previous session. That's known as a distribution day...Investor's Business Daily's research into past corrections and downtrends shows that five or six distribution days over a period of about four weeks can be a signal that the market's uptrend is weakening.

Another source said that a distribution day means a major index closes lower more than 0.2% on higher volume 4 or 5 times within 2 or 3 weeks.

Distribution Day: Methodology

I used 568 stocks from January 1, 2005 to July 1, 2010 in the test. I chose those dates because they were recent and because they nearly filled my spreadsheet with data (usually over 50,000 samples). I pulled the stocks from the list of those I follow on a daily basis. Stocks with closing prices below $5 were excluded from the test. I also threw out distribution days if the stock did not drop by more than 0.2%, so that it matched the Investor's Business Daily implementation.

I ran 16 different tests to uncover the goods on distribution days, mostly on individual stocks, but on the S&P 500 index as well. I started with two time periods, 14 days and 21 days (both calendar days, not trading days) for the window size where a cluster of distribution days should occur. For "heavy" volume, I tried a 21-trading day (about a month) moving average of volume and compared the distribution day to see if it was above one, two, and four times the average volume. Since this did not match the intent of the Investor's Business Daily implementation, I discarded the results.

I focused on a 21-calendar day window for a cluster of distribution days to appear, with volume either above or below the prior day's volume, and price trending higher or lower before the clusters began. Those match the parameters that others use.

Since Stalter's magazine article references an uptrend, I used a 10-trading day exponential moving average to determine the trend (up or down) and also conducted tests where I ignored the price trend.

For the distribution day count, which ranges from four to six times in the references cited above, I just let the median cluster count determine the number. Why? Because a number too high means the sample count drops. Few samples can be unreliable. If the technique really works, then it should appear in counts above versus below the median cluster count.

For each test, I measured how far price moved over time (from 1 week to 3 months) after the cluster of distribution days ended. Then I compared the moves for stocks having above or below the median number of clusters and the resulting performance over time.

For the S&P 500, I started from January 1950 and ran it to July 1, 2010 using the same methods.

Distribution Day: Methodology Example

To make this methodology clear, let me give you an example.

On January 21, 2005, 3M (MMM) had a distribution day occur but it was the only one within a 3-week window, giving a cluster count of 1. As another example, on April 5, 2005, 3M had 4 distribution days that occurred within a 3-week window ending on that date.

I let the program continue finding distribution days and counting how often they appeared within a 3-week window. The program found over 58,800 samples. The median number of distribution days was 3. That means half the samples had 3 or fewer distribution days within a 3-week window and the other half had more than 3 clusters within 21 days.

When I compared the performance, I found that a week after the cluster of distribution days ended, price was higher by 1% for those with 1-3 distribution days compared to a drop of 1% for those with more than 3 distribution days. I repeated the comparison for weeks 2, 3, and so on up to 3 months later.

Once I had the performance numbers for those above and below the median cluster count, I counted the number of times a distribution day above the median showed a larger drop over time than did those below the median, in a series of competitions. The results of those competitions appears below.

Distribution Day: Results

The following table shows the results for stocks in a series of competitions as explained in the prior section.

For example, if volume was heavier than the prior day and price was trending higher in the prior 10 trading days, none of the contests with above median distribution days had price drop further during the test periods from 1 week to 3 months later.

The next row down shows that if volume on the distribution day is higher than the prior day and price trends lower leading to the distribution day, price drops more if there is a cluster of distribution days than if there is not a cluster.

Comparing the volume column and the results, we see that volume is irrelevant to performance. If price trends down on heavy or light volume, price drops further after more distribution days.

The results show that the idea behind a distribution day is wrong on two counts. 1) Price only drops after a cluster of distribution days if price is trending lower, and 2) price drops further even after a light volume day.

You can download the summary spreadsheet of the tests by clicking on the link. It loads a 34k Excel spreadsheet.

Distribution Day: S&P Results

The results for the S&P 500 index is the same as that shown in the table above except for one cell: heavy volume, downward price trend for 1 week shows 0% instead of 100%. In other words, distribution days for the S&P 500 index don't work as advertised either.

-- Thomas Bulkowski

See Also

• Low priced patterns: Do they outperform? Yes. Best is $0-$10 range.
• Price trends. Consecutively higher/lower closes before the breakout offers performance clues.
• Price trends. Price trends over the last year helps make buying stock easier.
• Price velocity is similar on entry and exit from chart patterns.
• Price volatility. Stocks with volatility too high or low hurt profits.
• Price volatility vs. performance. Higher volatility is good.
• Factors influencing stocks. Find out how important trends are.

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