The NASDAQ ($COMPQ) has registered 6 distribution days in less than a month and the DOW ($INDU) has flashed 5 distributions days during the same period of time. The NASDAQ has gapped below its 50-d moving average (MA) while the DOW is hanging on to this shorter term support line. Both indices are still above their longer term support, the 200-d moving average, so a trend reversal hasn’t confirmed yet.

However, this clear distribution is giving us a message. What is that message?

Well, just as follow-through days signal the potential start of a new rally (uptrend), five or more distribution days within a few weeks (on above average volume) is starting to hint the rally is coming to an end.

It’s clear that the uptrend has halted its continuous trek to new highs while the odds favor that the market is heading towards a correction.

So, what do you do?

Immediately assess each of you individual holdings and start to lock in gains on stocks churning (no longer making new highs). You don’t have to sell the entire position but it may be a good idea to scale back and definitely get off margin if you are employing leverage.

As mentioned in a previous post, Market Reversal? View the NH-NL Ratio, the NH-NL ratio is the strongest secondary indicator on the market for a major trend reversal. The NYSE registered its first negative reading since November 16, 2010. The NASDAQ has registered its first multi-day negative readings since November 16-17, 2010. The overall 10-day MA differential for both indices is still positive but a move to negative territory will be the major confirmation.

Price and volume tips you off as the main indicator while the NH-NL ratio confirms the longer term trend reversal.

If following items confirm, I highly suggest that you move to cash and avoid the risk of losing recent gains or start to show a loss.

• 5 or More distribution days on multiple indices within a few weeks
• Index price moves below the major moving averages (50-d and 200-d MA)
• New High – New Low 10-d MA Diff turns negative
• And most important: your individual holdings are making lower lows and lower highs while slicing major moving averages

Nothing is guaranteed in the market but when distribution days pile up (in a short period of time), it’s time to take notice, lock in gains and look to move to cash if all support and confirmation indicators confirm.

Let’s keep an eye on the NASDAQ, DOW and NH-NL ratio.

The market closed last Friday registering the second most New High’s (NH’s) recorded in a database that I have going back decades. At 634 NH’s, it’s the most new highs registered on one day in almost 30 years. More than any one day during the dot com boom of the late 1990’s, more than any day recorded during the run in 1987 and more than anything this millennium.

Only one other date surpasses Friday’s total: Monday, October 11, 1982 when the DJIA closed at 1,072.79. The market recorded 653 NH’s, 7 NL’s, 1,504 advances, 292 decliners and “up” volume outpaced “down” volume by an almost 10-1 ratio.

The NASDAQ closed at 202.31 on the same day with 418 NH’s, 14 NL’s (not even in the top 10 for the highest number of NH’s ever recorded). Do note this: the highest NASDAQ reading ever came later that year on Thursday, November 4, 1982 with 525 NH’s (following that week’s election day).

So what does this all mean? Well, by mid-1983, the market surged higher by 20%. It continued to move higher until the crash in 1987 but long term, the market is up well over 10-fold since this NH extreme.

How about today’s market? I can only tell you this: we are in an up-trend as of today and until the market breaks that trend, do not try to “guess” when it will reverse.

I have my “opinions” of the market but as you all know, we must trade what is actually happening, not what we think should be happening. Yes, I am concerned the market would like to correct longer term based on poor economic policies, tremendous debt levels, a depreciating dollar and most important: possible inflation. But, until we get the true catalyst, trade what the market is telling you.

The 634 NH’s represents an extreme in the market and I will be watching for further catalysts. How long can this market sustain higher stock prices based on faulty growth? You can only take so many cash advances on your credit cards without paying before they cut off your borrowing capacity. Maybe I have it all wrong but I am concerned long term. Short term, the market is higher unless it says otherwise.

I leave you with this: the vast number of “gap-ups” in stocks making new highs concerns me. Do they want to fill? If so, we will have an almost endless supply of high quality shorts to trade.

Chart provided courtesy of www.Decisionpoint.com

Do you really want to know how to pick market tops and bottoms? Really?

Well, you don’t need a crystal ball, you don’t need any Wall Street guru’s, you certainly don’t need fancy computer software and you can simply ignore the talking heads. It’s that easy. Maybe we won’t pick absolute tops and bottoms but we can identify trends as they begin to develop.

You just need to follow the action among the individual stocks in the market! Learn to focus on the number of stocks making new highs versus the number of stocks making new lows. It’s been the true crystal ball in my method since I started to turn a consistent profit in 2002. It’s the backbone of my trend following methods.

The NH-NL Differential is simply the number of stocks making new highs minus the number of stocks making new lows.

I follow the progress of stocks making new highs and new lows on the NASDAQ and NYSE and pay specific attention to turning points in the differential. I am not so interested in the extreme highs or lows of the ratio but rather changes in trend from positive to negative and negative to positive over a period of time.

The yearly Nasdaq New Highs and New Lows (Differential) are captured in my charts below, dating back 10 years. With many market pundits (or talking heads) saying that we may have reached a bottom, I felt it was time to do some homework and study the past charts so we know what to look for in 2009. It is true that the trend seems to be changing but we aren’t quite there yet. Focus on 2002 and 2003 to get an idea of what we may see if this market decides to make a true up-trending run, one that’s sustainable.

Consistent Nasdaq readings above 100-200+ will be the official confirmation to grab and add shares for trend traders!

[Read more...]