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How to avoid buying the market top and other important galactical developments

March 16th, 2006 at 04:06 pm

Action of the last few days (March 14 & 15):

The major indexes have completed the 1-2% up trend that I predicted a on March 13. If it continues to go up, the market performance will exceed my prediction. The volume of the last two days was decent, but not as high as as that seen on some of the down days of about a week to two weeks ago.

Tip of the day:

Look at the charts of the major markets for signs of strength or weakness. How? If you see the indexes going lower on higher volume than the last up day's volume, it is probably experiencing a "distribution day", where the institutional investors are selling off. If you see at least 3-5 of those in the latest 2-4 week period, that is a sign of weakness. Also, if the market peaks during the day and then reverses to close in the range of slightly higher or slightly lower on higher volume, this is probably "churning" and also counts as distribution. At this point the count stands at 2 for the NASDAQ and S&P 500for the last 4 weeks. When distribution days occur I will make note of them. Can you find those days on those charts? Check it out for March 2000 and for periods leading up to other bear markets. This gauge works really well when the distribution is on above average volume. However, do not take it out of context: It should not be taken as seriously if the overall recent volume is below average when the higher volume selling days happen.

As far as trending the market goes, it makes sense to look at the overall recent volume of the up vs. down days of about the last month or so. The period of selling on the major indexes around the beginning of this month had overall higher volume than the current uptrend. I see this as a negative sign, as it may be an easy set up for the sellers to step in and take over.

Feel free to post any questions or comments about this or any other investment questions you may have.


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