Distribution

What is Distribution?

Distribution is the phase of the market cycle where large players sell their accumulated shares at elevated prices. They sell gradually into buying demand from retail traders and late momentum chasers, avoiding large sell orders that would crash the price before they finish exiting.

What distribution looks like on the chart

• Range-bound action at highs: after a strong run-up, price stops trending and chops sideways. It looks like it is "taking a breather" but the large player is selling
• Volume spikes without progress: heavy volume days occur but price does not make new highs. The volume is the large player selling into demand
• Failed breakouts: price pushes above the range briefly, attracts breakout buyers, then falls back in. This is the upside equivalent of a shakeout, trapping buyers at the top
• Lower highs within the range: the rallies get weaker as selling pressure increases

Signs that distribution is ending

• Breakdown on volume: price drops below the range with heavy volume. The markdown phase has begun
• Gap down: sometimes distribution ends with a gap down on news as the final exit
• Support becomes resistance: the bottom of the distribution range becomes a ceiling that price cannot get back above

How to avoid getting caught

• Be skeptical of range-bound action at highs: after a big run-up, consolidation is not always bullish. It may be distribution
• Watch volume: high volume with no new highs is a warning sign
• Do not buy breakouts at the top of extended moves: if the stock already ran 50%, a breakout from a range at the top is more likely to be a trap than a continuation

Accumulation is boring at the bottom and leads to an uptrend. Distribution is exciting at the top and leads to a downtrend. If you can tell the difference, you are ahead of most traders.