Page 335 - How to Make Money in Stocks Trilogy

M = Market Direction: How You Can Determine It 211

market to follow through on its first recovery attempt should probably be
met with further selling on your part.
You’ll know that the initial bounce back is feeble if (1) the index advances
in price on the third, fourth, or fifth rally day, but on volume that is lower than
that of the day before, (2) the average makes little net upward price progress
compared with its progress the day before, or (3) the market average recovers
less than half of the initial drop from its former absolute intraday high. When
you see these weak rallies and failures, further selling is advisable.

How CAN SLIM and IBD Red-Flagged
the March 2000 Nasdaq Top

In October 1999, the market took off on a furious advance. Fears of a Y2K
meltdown on January 1, 2000, had faded. Companies were announcing
strong profits for the third quarter just ended. Both leading tech stocks and
speculative Internet and biotechnology issues racked up huge gains in just
five months. But cracks started to appear in early March 2000.
On March 7, the Nasdaq closed lower on higher volume, the first time it
had done so in more than six weeks. That’s unusual action during a roaring
bull market, but one day of distribution isn’t significant on its own. Still, it
was the first yellow flag and was worth watching carefully.
Three days later, the Nasdaq bolted up more than 85 points to a new high
in the morning. But it reversed in the afternoon and finished the day up only
2 points on heavy volume that was 13% above average. This was the second
warning sign. That churning action (a lot of trading but no real price
progress—a clear sign of distribution) was all the more important because
leading stocks started showing their own symptoms of hitting climax tops—
action that will be discussed in Chapter 11. Just two days later, on March 14,
the market closed down 4% on a large volume increase. This was the third
major warning signal of distribution and one where you should have been
taking some selling action.
The index managed to put together a suspect rally from March 16 to 24,
then stalled again for a fourth distribution day. It soon ran out of steam and
rolled over on heavier volume two days later for a fifth distribution day and
a final, definite confirmation of the March 10 top. The market itself was
telling you to sell, raise cash, and get out of your stocks. All you had to do
was read it right and react, instead of listening to your or other people’s
opinions. Other people are too frequently wrong and are probably clueless
about recognizing or understanding distribution days.
During the next two weeks, the Nasdaq, along with the S&P 500 and the
Dow, suffered repeated bouts of distribution as the indexes sold off on heav-