Distribution Days: How to track market weakness in a confirmed uptrend

Vipin Khare

Vipin Khare

We all know the importance of market status in determining an investor’s stance in the CANSLIM style.

It not only helps you realize gains by being aggressive when the risk is minimal but also protects you from unwarranted risks of markets.

When the market is in a confirmed uptrend, it is the best time to make most of your gains. This is when most breakouts are successful, and hence an investor carefully following the patterns of his/her stocks to realize big gains.

But how can you pre-empt the probable weakness in the market so that one can lock-in gains and play defensive with less or no exposure? A distribution day can provide a systematic and credible approach to do that.

What is Distribution Day?

A distribution day is when a market representative index (for example, Nifty 50) loses more than 0.2 percent in a day, with volume higher than that of the previous session.

When a distribution day occurs, it hints that big institutional investors are exiting or reducing their positions in the market. Institutional activity is what moves any market, especially in India where retail participation is small.

How does it help in sensing market weakness?

When the market is in an uptrend, the intensity of market weakness is determined by the distribution day count. An investor keeps count of all valid distribution days (as per above definition) during an uptrend.

Successive distribution days imply a weakening market. But what threshold of distribution day count is enough to say the market is under pressure?

A distribution day count of 2-3 is benign and usually normal in an uptrend. But when the count goes to 5-6, one should prepare to get his/her positions trimmed.

Distribution Day Expiry:

Even though a distribution day hints that institutions may be liquidating their positions, it loses its impact after 25 trading sessions. A distribution day is also removed from the count after the index rallies 5 percent above that day’s close.

When the Nifty 50 started in a Confirmed Uptrend from July 10 onwards, it experienced its first distribution day on July 18 (D1) and the second on August 10 (D2).

The third, fourth, and fifth distribution days occurred on August 29 (D3), September 4 (D4), and September 11 (D5), respectively. D1 had already expired by then, putting the total distribution day count at 4. But the market started showing weakness with the fifth distribution day count (D6) on September 18.

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