Historic Price Moves In the Midst Of Broad Distribution Patterns

Since their Climax Runs into September 2, the NAZ and SPX have carved out what look like aberrant Broadening Top formations.

The classic Broadening Top is a pattern that looks like a megaphone with 5 points of successively higher highs and lower lows.

Currently, both indexes show a 5 point pattern of swing highs and swing lows since September 2, but they are not perfect megaphones.

For example, while the NAZ did eke out a new INTRADAY high last Monday over its September 2 high, it reversed with authority during the session, leaving a Key Reversal day which looks like a test failure of the September 2nd high. Someone was clamoring into the market last Monday on emotional trade of a vaccine, but given the Spike & Reversal, it looks like smart money was selling the news.

Yesterday’s news of another vaccine saw the NAZ rally but remain within the shadow of its two big reversals — from September 2 and November 9.

For its part, the SPX eclipsed its September 2 high a week ago but reversed to close on session lows — failing to set a new closing high.

It has had two consecutive record closing highs in the last two sessions, but has not cleared its all-time intraday high from November 9.

So a short-term non-confirmation exists between the SPX and the NAZ

If the SPX clears its November 9 reversal high, it suggests an extension higher with a Gann Tunnel Target at 3720 into late December… a time & price projection explained in yesterday’s report.

Even if that potential is satisfied, the likelihood is the SPX will take the scenic route, a very volatile route, versus a direct route in getting there.

Clearly that adheres to the complexion of the price action since September 2.

Breakage by the SPX and NAZ below last Thursday’s lows puts further bullish potential in jeopardy.

The NAZ had a nice day on Monday, but it continues to mask distribution among many former leading growth glamours.

We have to put today in the context of the Selling Climax Reversal from last Monday/Tuesday.

You’ll typically get a snapback or a dead cat bounce from abrupt reversals.

The NAZ has bounced back into the emotional up gap on November 9.

The old expression is the bigger the top, the bigger the drop and the bigger the drop, the longer it takes to repair.

However, Mr. Market loves to turn bromides on their head.

From the Covid Crash that ended on March 23, it took the NAZ only 9 weeks until June 5 to get back to its February high.

So while dead cat bounces are the rule of thumb, the market can do and will do anything at any time.

Whenever Mr. Market thinks the Street is onto his game, he likes to throw a curve ball to back them off the plate.

This is the enigma of the Talented Mr. Market.

On the one hand, we know he doesn’t like to accommodate.

On the other hand, the best approach is not to overthink things and to believe what you see until proven otherwise.

In other words, don’t become part of the Groucho Syndrome.

This is derived from Groucho Marx's famous quip when asked if he belonged to a certain country club, he replied, “I wouldn’t want to be a member of any club that would have me.”

In the markets, you want to be a part of the Line of Least Resistance crowd.

The crowd, be it money managers, hedge funds or investors at large, make the trend.

You want to ride that trend until proven otherwise.

“Until proven otherwise” is often easier said than done. Trying to determine when the trend is bending in earnest is an art, not a science.

Selling is much more of an art than a science.

Sometimes the art is a Rembrandt and is as it seems.

Sometimes the art is more like a Picasso and nothing is as it seems.

I solve the angst by looking to buy strong stocks when they crouch and by looking to sell weak stocks when they stand on their tiptoes.

I continue to Hit & Run and do this until there is a conspicuous change in behavior.

In other words, a failed pullback buy setup and a failed snapback short setup.

The easiest way to listen to what a stock is saying is when it does something you don’t expect it to do.

When this happens in an uptrend, it is a sign of distribution.

Now one or two distribution days do not a change in trend make, but when a 3rd distribution day shows up, it’s often a red flag.

Examples of distribution amongst recent leaders are SILK, CHGG and ZS, to mention a few.

SILK gapped up to a new high above its September high on November 9 but reversed leaving a large range Gilligan sell signal and a Key Reversal Day on an expansion of volume.

A Gilligan is a strategy I created in the 1990s in my book Hit & Run Trading that does a good job identifying exhaustion.

A Key Reversal Day is a new 52 week high with a close below the prior day’s low.

Following such reversals, it is typical to get some kind of a dead cat bounce the next day, which is exactly what played out in SILK.

The next session, November 11, saw a Breakaway Gap on a large expansion in volume below the 50 day moving average.

Yesterday, SILK left a 3rd distribution day… a large range decliner on increasing volume on trade below the now declining 20 day moving average.

The takeaway: SILK’s Line of Least Resistance is pointing lower.

CHGG struck a nominal new high on October 26. While it closed closer to the bottom of the day’s range than the top, it didn’t really do anything wrong.

However, the next session saw a Breakaway Gap on a large expansion in volume which was a major distribution day.

From there, CHGG slid below its moving average and tried to recapture it.

It was a failing rally that saw another large range distribution day last Monday on another Breakaway Gap below its 50 day line on an expansion in volume.

CHGG shows 3 major distribution days and a pattern of lower highs and lower lows.

ZS is a growth glamour that hasn’t made a new high since September 2.

It left a series of distribution day’s throughout September that led to an undercut of its 50 day line.

Reclaiming the 50 day perpetuated a failing rally that tested the low of the high bar day.

ZS went on to lose its 50 day line again in early November and once again tried to reclaim it, but was only able to do so briefly.

On Monday, November 9, ZS left a major distribution day.

Last Friday, ZS rolled over, following a failed backtest of its 50 day line and leaving another distribution day.

So ZS has a series of distribution days as well which have traced out a pattern of lower highs.

The common thread in the pattern of distribution in the above three names are that brief rallies were used by institutions to sell into. This is the modis operandi of how big money exits a position: rallies are sold into rather bids being hit… so as not to completely rock the supply/demand equilibrium boat.

Due to the size of their positions, institutions must sell into strength or risk destroying the structure of a stock they are exiting.

These patterns of distribution show up on the tape.

Currently, patterns of failed rallies in the SPX and NAZ and in many of the leading names that spearheaded the advance since the March low indicate distribution.

This gives members of the Hit & Run Report and Hit & Run private Twitter feed many opportunities to swing both sides of the market based on rules based, time-tested strategies I have created over a 35 year trading career.

You can’t always like them to “buy higher and like them to sell lower.” My 3 Day Chart and 3 Week Chart Method do a good job of identifying when a strong stock is crouching in a buy position, and vice versa when a weak stock is standing on its toes and suspect.

Two recent examples are the initiation of a long swing position in RAMP last week at 60.69 and Friday’s late swing short in CRWD at 132.60, which was covered near Monday’s open for a 2.50 gain.

“The markets are the same now as they were five to ten years ago because they keep changing — just like they did then.” – Ed Seykota

As traders, whether we like it or not we’re in the pattern recognition business. These are patterns of distribution and accumulation which are always changing. If you have a method to read these changes get out when in doubt you can make speculation a profitable profession.