As the market rallies back from the recent sell-off, the calm seems to return to investors. At this point in the rally I really think this could be best related to a short-term pleasure that might only make the long-term pain worse.

I say this because I believe we have begun to see the first major signs of smart money distribution. I’ve got the two periods circled on the chart above.

After studying Volume Spread Analysis, I learned that the professionals must do their selling in phases in order to keep the market from falling too quickly and to achieve the largest profits possible. From this knowledge, you can see that it is very likely that the smart money started to sell a portion of their positions, allowed the market to continue to rally higher, sold some more, and is now allowing the rally to continue.

One of the biggest signs that this is the case for me is that the market has rallied less and less after each sell-off. The biggest question is how much longer before the selling reaches a tipping point and the market rolls over. IBD states that you should look for a series of 3-5 days of distribution over a period of 2-3 weeks. Only recently did we see this occur, but the selling did not force the bulls out of the market completely.

From the looks of things, I would say that one more round of selling would do the job. The major tipping point for me is if the markets fall below the 50MA. That would be the sign that the rally is over and it’s time to short. Of course, it is always important to diagnose the situation when we get there but this is my best guess.