Page 334 - How to Make Money in Stocks Trilogy

210 A WINNING SYSTEM

distribution over any span of four or five weeks, the general market will
almost always turn down.
Four days of distribution, if correctly spotted over a two- or three-week
period, are sometimes enough to turn a previously advancing market into a
decline. Sometimes distribution can be spread over six weeks if the market
attempts at some point to rally back to new highs. If you are asleep or
unaware and you miss the topping signals given off by the S&P 500, the
NYSE Composite, the Nasdaq, or the Dow (which is easy to do, since they
sometimes occur on only a few days), you could be wrong about the market
direction and therefore wrong on almost everything you do.
One of the biggest problems is the time it takes to reverse investors’ pos-
itive personal opinions and views. If you always sell and cut your losses 7%
or 8% below your buy points, you may automatically be forced to sell at least
one or two stocks as a correction in the general market starts to develop.
This should get you into a questioning, defensive frame of mind sooner. Fol-
lowing this one simple but powerful rule of ours saved a lot of people big
money in 2000’s devastating decline in technology leaders and in the 2008
subprime loan bear market.
It takes only one of the indexes to give you a valid repeated signal of too
much distribution. You don’t normally need to see several of the major
indexes showing four, five, or six distribution days. Also, if one of the indexes
is down for the day on volume larger than the prior day’s volume, it should
decline more than 0.2% for this to be counted as a distribution day.

After the Initial Decline Off the Top,
Track Each Rally Attempt on the Way Down

After the required number of days of increased volume distribution around
the top and the first decline resulting from this, there will be either a poor
rally in the market averages, followed by a rally failure, or a positive and
powerful follow-through day up on price and volume. You should learn in
detail exactly what signals to look for and remain unbiased about the mar-
ket. Let the day-by-day averages tell you what the market has been doing
and is doing. (See “How You Can Spot Stock Market Bottoms” later in this
chapter for a further discussion of market rallies.)

Three Signs the First Rally Attempt May Fail

After the market does top out, it typically will rally feebly and then fail. After
the first day’s rebound, for instance, the second day will open strongly but
suddenly turn down near the end of the session. The abrupt failure of the