How You Can Recognize

Market Tops and

Market Bottoms
Sell

Buy

Market Tops
After a sustained market uptrend, there will always be signs when the
advancing phase is over. These signs will come as the market is still
advancing. The key signal the market may be in a topping process is
an increase in the number of distribution days in at least one major
market index. A typical distribution day is one that closes down from the
previous day (at least -0.2%) on higher volume than the prior day. This is
your first clue institutional investors are selling stocks.
Up to five distribution days over a period of four or five weeks usually
signals that the market is beginning to top. In addition to days down,
you should also look for stalling days. When you suspect a stalling day,
be sure to observe the price action for the previous day. The day before
a stalling day will show a significant price increase when compared to
its previous day. The stalling day will show only a tiny amount of price
progress compared to its previous day and volume either increases or
remains heavy. This I call heavy volume without further price progress
up.
Another thing to watch is the action of the leaders. As the market is
topping many of your market leaders may also show topping signs
themselves. In addition, you may find you need to sell a stock because
it drops 7-8% below your purchase price. Pay attention when the market
starts forcing you out; it can help you protect your capital.

Market Bottoms
Market bottoms are deciphered by your observing the daily price
and volume action on the four major indices: the S&P 500, Nasdaq
Composite, New York Stock Exchange (NYSE) Composite and Dow
Jones Industrials. After the market makes a low, look for the first day
the market closes up from the previous day. This is normally day one
of a rally attempt. As long as the index is able to remain above the
previous low, the attempted rally is in place.
The next step is to wait and watch for one or more of the four market
indices to show a follow-through day. This is a day where the index
closes up significantly on volume heavier than the previous day. The
S&P 500 or NYSE Composite typically need to close up 1.7% or either
the Nasdaq Composite or Dow Industrials need to close up 2.2% or
more. The first three days of an attempted rally are too soon to judge
if the market confirms its new uptrend by having a follow-through day.
Follow-through days can happen on the fourth day or later of the rally
attempt.
It is important to note that not all follow-through days lead to sustained
new market uptrends. About 20-30% of the time they may fail fairly
quickly. However, no bull market has ever started without a followthrough dayand it will occur when most people are unsure and afraid
because the news during the decline was so negative that people
become doubtful and hesitate to act on the confirmed new uptrend.
The Big Picture column, found on the front page of Investors Business
Daily everyday, can give you strong insight and help in determining
the market direction. Also, watch the daily Market Wrap video found at
www.investors.com.
The charts on the next two pages provide definitions of key features
included in IBD chart examples and can be used as an additional
reference as you go through this booklet.
We look forward to helping you become a more skillful, successful
investor with the knowledge to know how to always spot major market
tops and bottoms that in turn create all new bull markets. You can do
this.

William J. ONeil

1990 Dow Jones Industrials Market Top

Stalling day

Stalling day

4
5

Daily Chart Daily charts are used to interpret price

and volume action of market indices.

Distribution day count is shown for market

tops with the numbered arrows. Stalling
days are counted as distribution days.
50-day moving
average price line
200-day moving
average price line

Numbered arrows match up

the distribution days volume.
For the Dow Jones Industrials index, after 1962, volume
for the entire New York Stock Exchange (NYSE) is used

3
2

Average daily
volume line

1
NYSE Volume in 100s

Copyright 2009 Investors Business Daily, Inc. All rights reserved

Daily volume bars

1990 S&P 500 Market Bottom

Thick black line means index
closed at a higher price than
prior days close

Despite a looming war, after Iraqs invasion of

Kuwait, a confirmed rally began.

Daily Chart Daily charts are used to interpret price

and volume action of market indices.
Thin gray line means index
closed at a lower price than
prior days close

High
Close
Low
Dashed line
marks intraday
low before new
rally begins
No valid follow-throughs on
these rallies so you dont
jump back in prematurely.

Follow-through on
5th day+2.34%.
Day 1

For S&P 500 index, volume for the entire New

York Stock Exchange (NYSE) is used
Daily volume bars

Average daily
volume line

Heavier volume
than previous day

NYSE Volume in 100s

Copyright 2009 Investors Business Daily, Inc. All rights reserved

50-day moving
average price line
200-day moving
average price line

1929 Dow Jones Industrials Market Top

3
1 2

Stalling day

Volume remains
heavy on stalling day

3
1 2

Dow Volume in 100s

Copyright 2009 Investors Business Daily, Inc. All rights reserved

4 5

Five distribution days in three

weeks signaled the top

1987 Dow Jones Industrials Market Top

Five distribution days in five

weeks signaled the top

2 3

4 5

Recognizing the distribution days

in the summer saved you from a
23% drop on Black Monday

NYSE Volume in 100s

2 3

Copyright 2009 Investors Business Daily, Inc. All rights reserved

2000 Nasdaq Composite Market Top

Stalling day - reverses

from new high territory and 2
closes near the lows up only
0.03% from previous day

Leading stocks were showing

climax top signals at the same time
4 Another stalling day

3
1

Five distribution days in four

weeks signaled the top

Volume remains
heavy on stalling days

2 4

5
1
Nasdaq Volume in 100s

Copyright 2009 Investors Business Daily, Inc. All rights reserved

2007 Nasdaq Composite Market Top

1 2

It was crucial to spot this

top which culminated in the
financial crisis of late 2008.
It was time to raise cash.

4
5

Five distribution days in three

weeks signaled the top

4 5
2 3

Nasdaq Volume in 100s

Copyright 2009 Investors Business Daily, Inc. All rights reserved

10

1974 Dow Jones Industrials Market Bottom

Follow-through on 4th day

+2.70%, eventually fails Follow-through on 7th day
+1.82%. A lower threshold
for follow-through days was
Day 1
used back in 1974. Up 1%
or more was sufficient.
Day 1

Heavier volume
than previous day

Heavier volume
than previous day

NYSE Volume in 100s

Copyright 2009 Investors Business Daily, Inc. All rights reserved

1998 S&P 500 Market Bottom

Fear was heavy at the time with a Russian
financial crisis and the collapse of Long
Term Capital Management hedge fund

Follow-through on 5th
day eventually fails
+5.09%
Day 1

Heavier volume
than previous day

Follow-through
on 5th day
+4.17%

Day 1

Heavier volume
than previous day

NYSE Volume in 100s

11

Copyright 2009 Investors Business Daily, Inc. All rights reserved

12

1999 Nasdaq Composite Market Bottom

Next day has another gap

up and closes +3.17%;
gives extra confirmation
Not much was expected out of the
market at this time due to Y2K fears

Follow-through on
7th day+2.59%
with a gap up
Day 1

Heavier volume
than previous day

Nasdaq Volume in 100s

Copyright 2009 Investors Business Daily, Inc. All rights reserved

Strength continues next day

on even heavier volume

2003 Nasdaq Composite Market Bottom

Oil fears, war in Iraq, and a prolonged bear
market might have made you feel uneasy
about investing at this time. Thats why rules
are so important. They take the emotion out
of your decision making process.

Follow-through on
4th day+3.88%
Day 1

Even though there is a lot of

strength on Day 2 it is too soon
for a follow-through day so we
are still counting and waiting.

There was a persistent trend of

heavier volume on up days. This was
a subtle clue of accumulation.

Heavier volume
than previous day

Nasdaq Volume in 100s

13

Copyright 2009 Investors Business Daily, Inc. All rights reserved

14

2007 Nasdaq Composite Market Bottom

Although it was a short rally, many of the
leaders notched significant gains.
Strong day on
heavier volume but
only +1.25%
Follow-through on
10th day+2.50%

Day 1

Powerful 2nd day,

but too early

It doesnt matter that

volume is below average,
as long as it is higher
than the previous day.

Nasdaq Volume in 100s

Copyright 2009 Investors Business Daily, Inc. All rights reserved

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How You Can Recognize

Market Tops and
Market Bottoms

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