{"id":196247,"date":"2024-07-23T08:39:58","date_gmt":"2024-07-23T12:39:58","guid":{"rendered":"https:\/\/ibkrcampus.eu\/uncategorized\/chart-advisor-lessons-from-dominos-pizza\/"},"modified":"2024-07-24T09:22:48","modified_gmt":"2024-07-24T09:22:48","slug":"chart-advisor-lessons-from-dominos-pizza","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.eu\/campus\/traders-insight\/securities\/macro\/chart-advisor-lessons-from-dominos-pizza\/","title":{"rendered":"Chart Advisor: Lessons from Domino’s Pizza"},"content":{"rendered":"\n

By David Keller. CMT<\/a><\/p>\n\n\n\n

Anatomy of a Market Top: Lessons from Domino’s Pizza<\/strong><\/p>\n\n\n\n

Investopedia is partnering with CMT Association on this newsletter.  The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.<\/em><\/p>\n\n\n\n

Anatomy of a Market Top: Lessons from Domino’s Pizza<\/strong><\/h2>\n\n\n\n

Let’s dive into an intriguing case study to kick things off\u2014Domino’s Pizza Group (DPZ). It’s a stock that’s recently made headlines for all the wrong reasons, gapping lower this past week and serving as a textbook example of a distribution phase. But why is this case so enlightening, and what can it tell us about the broader market trends, particularly the S&P 500? Stick with me, and we’ll break it down.<\/p>\n\n\n\n

WHAT IS A MARKET TOP, ANYWAY?<\/strong><\/p>\n\n\n\n

Before we jump into the specifics of Domino\u2019s, let’s make sure we\u2019re all on the same page about a market top. Essentially, a market top is where a stock transitions from an upward trend (accumulation phase) to a downward trend (distribution phase). This is more than just a temporary dip; it’s a significant shift signifying that the buying power is dwindling and selling pressure is taking over.<\/p>\n\n\n\n

Check out our recent discussion on what should be included in your <\/em>Market Top Checklist!<\/em><\/a><\/p>\n\n\n\n

WHY DOMINO\u2019S PIZZA?<\/strong><\/p>\n\n\n\n

So, why focus on DPZ? Domino’s hit a peak in April this year, driven initially by what can be described as an “exhaustion gap.” After a remarkable run, the stock surged up one final time, much like a marathon runner gasping for that final breath at the finish line. Unfortunately, while we retested those April highs in June, we never actually moved higher. In fact, things started to fall apart in late June and early July. Domino’s ended up gapping lower this week, plummeting below its 200-day moving average, and dropping around 13.5% on Thursday alone.<\/p>\n\n\n\n

Now, was this surprising? Not if you’ve been paying attention. The signs were all there. Let\u2019s dissect the anatomy of this market top to uncover those telltale signals.<\/p>\n\n\n\n

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Past performance is not indicative of future results<\/p>\n\n\n\n

THE TRANSITION FROM ACCUMULATION TO DISTRIBUTION<\/strong><\/p>\n\n\n\n

First, recognize the phases. An accumulation phase is marked by higher highs and higher lows, showing that buying power is outstripping selling pressure. On the other hand, a distribution phase is characterized by lower lows and lower highs, indicating that selling pressure is taking over.<\/p>\n\n\n\n

In the case of DPZ, the accumulation phase was visible all the way through the start of this year. Higher highs, higher lows, prices comfortably above upward sloping moving averages, and strong momentum\u2014all checked out.<\/p>\n\n\n\n

Around late April, however, a different picture began emerging. We saw the first red flag: Domino’s failed to make a new high. Then came the next crucial indicator\u2014the breakdown below the previous swing low. By early July, it was evident that the pattern had shifted. The stock dipped below its 50-day moving average, which started to slope downwards. These were clear signals that the accumulation phase was over, making room for the distribution phase.<\/p>\n\n\n\n

When looking at the current top, we should consider the <\/em>Ten Questions E<\/em>Sign In – Market Misbehaviorvery Investor Should Ask<\/em><\/a> before changing strategy!<\/em><\/p>\n\n\n\n

MOMENTUM MAKES ITS MOVE<\/strong><\/p>\n\n\n\n

Another critical factor to examine is the momentum. During the accumulation phase, the RSI (Relative Strength Index) for DPZ showed consistent strength, rarely dipping below 40. But in early July, we saw the RSI fall under 40, confirming the change in momentum. Essentially, when the RSI drops from above 50 to below 50, it tells us that down days are starting to outstrip up days. And in a distribution phase, that\u2019s a sign of investors starting to sell off.<\/p>\n\n\n\n

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