The current market environment has grown more and more volatile these past few weeks. Last year, we saw one group after another step up and shoulder the heavy lifting as the market continued to work higher. Now we are seeing the opposite -- one group after another is stepping up to take the plunge.
The selling has even spread to the safety stocks now. I would like to bring two companies to your attention:
. The two charts are like identical twins.
Here's an intermediate-term chart on General Mills.
As with so many charts since the period from May to July 2009, GIS headed higher with a
trend. That trend was suspect because as prices broker higher, volume didn't confirm. The eventual result of such a trend is for it to retrace and retest. That retest can lead to a regeneration and renewal of the uptrend, or a failure and even lower prices.
This chart appears as if that process has begun and I say that because of the volume off the top. When a stock gaps away and leaves heavy volume trails off the high that is most likely big money deciding it has to cut and run.
The scenario goes like this: The larger holders decide that it is time to take profits. To do so, they place a bid under the stock to draw in more buyers while they simultaneously sell it as fast as they can without pushing prices lower. If prices drift too low, they come back in and prop up the stock in order to do the same thing. They get press releases going and may even find an upgrade or two. This goes on as long as they feel they can sell their large blocks at what they believe to be high prices because they naturally want to get as much as they can out of it. This is called distribution.
In some situations, as with GIS, they don't have to do much propping up because the general market does it for them. The big drop on heavy volume at the end of the distribution period is usually a sign that a sizeble group of large holders or just a few very large holders decided that the risk of distributing is greater than simply marking down their holdings and dumping them for what they can get. That's when you get volume off the top. That is called markdown.
Take a look at the weekly chart on Kellogg.
It displays almost the identical story. Both trade in the same consumer goods sector, were suspect bullish, and have volume off the top. Kellogg appears to have had more distribution taking place, which is more dangerous because when it does break below the $52 price point you will have three months of trades underwater. That then becomes huge resistance to any price climb.
Distribution always takes place at the highs. It's the large seller's way of transferring ownership to you. If you can recognize that it is happening, then you can recognize when it's time to leave the party -- before everyone reaches for the door.
If you are in GIS or K, you should seriously consider booking your gains or cutting your losses short. If it turns out that I'm wrong, you will most likely be able to get back in without much pain. For the more aggressive traders out there, both of these have very nice short setups now.
Until next time, just keep trading the charts!
At the time of publication, Little had no positions in the stocks mentioned, though positions can change at any time.
L.A. Little, author, professional trader and money manager, writes daily on
, a free educational site for traders and investors. He has been featured in numerous publications and is the author of
His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.