Distribution selling: this is a bullish sign for the stock market?


The S&P 500 has had a couple of very interesting days. Notice how the S&P has closed near its daily LOW each day.

Candlestick analysis calls this “long upper whiskers”, which is basically a fancy way of saying “the stock market closes in the lower end of its daily range”.
When the stock market goes up from the OPEN and then closes near the bottom of its daily range, conventional technical analysis sees this as a sign of “distribution selling”, which is supposedly bearish.
But is it?
The S&P 500 has closed in the bottom half of its daily range for 7 days in a row. Here’s what happens next to the S&P 500 (historically).
*Data is from 1970 – present because daily HIGH and LOW data before the 1970s is inconsistent.

Context is important. There’s a big difference between “distribution selling” when the stock market is going up and “distribution selling” when the stock market is already down in the dumps.
Here’s our filter:
Look at only the historical cases in which the S&P 500 was above its 200 daily moving average (i.e. in an uptrend).

Conclusion

As you can see, this kind of “distribution selling” frequently precedes large melt-ups. Not exactly a bearish sign for the U.S. stock market.
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