What Is A Distribution Day?

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What Is A Distribution Day?

by Ty Coon on July 28, 2010

a distribution day is when a market index closes lower on higher volume. Technically, in order for it to count as a distribution day, the index must close at least .2% lower. Anything less than that and it doesn’t count. Each day the IBD keeps track of the major indexes – the S&P 500, Dow Jones Industrial, NYSE Composite and the NADSAQ — and determines what the current outlook is for the market.

When the market is in a confirmed uptrend, or the uptrend is under pressure, this is when you need to be on the look out for the institutionally selling. This shows up when the market closes lower on heavy volume that was a higher than the previous day and is called an IBD distribution day.

It is possible for one index to show distribution and another not. That’s why the IBD keeps track for each index. While you can keep track of these days on your own, it’s just as easy to subscribe to the IBD and let them keep track of it. It does make sense though to look at each index daily to determine what happened. A distribution day in of itself is not necessarily a bad thing, but when four to seven distribution days add up, it can turn the market. Knowing the market trend is important because you only want to invest in a market that is a confirmed uptrend.

To get a handle on how to determine the overall stock market investing direction, it’s also a good idea to watch the IBD TV Market Wrap and read the Big Picture Column. Also refer to the How’s The Market page in the Investor’s Business Daily.

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Distribution Days Explained

by Blain

Earlier this year I wrote on accumulation days and how they worked, well you can't have accumulation and leave out distribution right!? So, this investor education article will explain distribution days, how they work, and what they mean, in of course ST 101 fashion.

1st Point, Distribution = Selling

Distribution is simply the word, "distribute" with the "ion" tacked on! So, first thing is first, to distribute something means to divide or give out, deal out, disperse, etc.

When I relate distribution to volume, or the amount of shares traded in a given day, I simply think of "selling". Since we are giving out, dispering, etc. shares we really are selling our shares inna sense. So, the first major point to note about distribution days is that it is related to the SELLING of shares, not buying (which is accumulation).

2nd Point, More Selling than Buying

Once we can relate distribution as selling, you can begin to see that it is not a good thing. In the stock market, when people are distributing or selling their shares, the stock is most likely falling in value. RED is the color that is almost always related to selling of stock.

We also know though that in any given day in the stock market, there is both buying and selling going on. There is not one day where there is simply ALL sellers and no buyers (even though with some stock crashes it may seem that way). BUT, there are days were there is simply more selling than buying.

For simplicity sake, if there are more buyers than sellers, then we can assume that the stock will end UP overall on the day. If there are more sellers than buyers, then we assume that the stock will end DOWN overall on the day. Which makes up our second point about distribution days, in a distribution day, there is more SELLING than buying, and the stock as a result ends the day DOWN.

3rd Point, Greater Volume than Day Prior

This is the most important piece of the puzzle when looking at distribution days. For a day to be considered a distribution day, the stock not only has to end down overall, but there also has to be more VOLUME traded than the day before.

Very easy to understand, because we know that volume is simply the number of shares traded in a given day. So, if yesterday stock XYZ traded let's say 100,000 shares, then for today to be distribution the stock must end the day down overall, and trade more than 100,000 shares. In lingo fashion, what happened is the stock was down on greater volume than the day prior!

Advanced Education, "Heavy" distribution

Just for fun for those 202 readers, the term "heavy" can be added to make a day a "heavy distribution day" with the right circumstances.

For a distribution day to be considered heavy, the volume not only needs to be greater than the day prior, but ALSO greater than the average daily volume. You can find the average daily volume (3 month average) on yahoo finance right below where it lists the total volume on the day. Just look for "AVG VOL".

In Summary

To remember what a distribution day is, remember the following:

1.When you think of "distribution" think of distribute, or SELLING, or the color RED
2.In a distribution day, there is simply more selling than buying.
3.To be considered distribution, there has to be more volume, or shares traded, that day versus the day before.
Put those together and you get the definition. So what is a distribution day? A distribution day is simply a day that a stock ends the day down overall on greater volume than the day prior.

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