Distribution Days Explained

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.

Tomorrow I will post up a quiz on this and accumulation, so subscribe to the feed (google reader is most popular), and stay up to date would ya?!

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