October 19th was
the 24th anniversary of the 1987 stock market crash, and interestingly enough
the Nightly Business Report interviewed Stan Weinstein that day to get his
thoughts on the crash. This interview piqued my interest due to the
fact that Stage Analysis is one of the methods I like to use to analyze the
market. The interview with Weinstein starts at about 4 minutes into the
clip. Below, I'd like to discuss some of the important statements he
made in the interview:
"What I learned long ago, when you're in a crash sequence, you
don't try and guess a bottom."
If you
read the book Secrets
For Profiting In Bull And Bear Markets, the number one rule Weinstein
says in the book is don't buy and hold anything in a Stage 4 chart pattern.
This means don't buy and hold anything declining below a declining
30-week moving average (see the graphic above). The basic reason is you
have no idea when the bottom will come. A small loss could turn into a
huge loss if you stick with something in a Stage 4. When the majority
of the stock market transitions into a Stage 4 pattern, it's called a bear
market.
"This didn't come out of the blue."
Weinstein
states in the interview that internal indicators he was monitoring were
breaking down before the crash. There was also a Dow Theory sell
signal, and the week before the crash the Dow Jones Industrial Average
crossed below the 30-week moving average in a big way, with heavy volume.
The chart below is a weekly chart of the '87 crash:
One
thing to note here. One week isn't usually the amount of time it takes
for the market to transition into a Stage 4, usually there is some type of
topping period or Stage 3 in between, and that topping pattern can take weeks
to months to form. But nevertheless there was enough technical damage
during the week before the '87 crash to recognize that something was
seriously wrong with the market going into the following week.
"When the market broke below 2450 you turn negative, and this is
a negative phase that we're in, and the market is now panicking."
Here,
by saying "negative" twice and "panicking", he's
emphasizing that the market was in a negative mood. Robert Prechter
likes to talk a lot about the "social mood" of society and how it
affects the market, and how shifts towards negativity in the world lead to
the biggest market collapses. A Stage 4 is essentially a shift towards
pervasive negativity for the market, which in many ways reflects what is going
on in the economy and the world, and that's what Weinstein was trying to get
across in that statement. Think about all the negativity in the world
today with the Eurozone crisis, Occupy Wall Street, signs of a new worldwide
recession, etc. Combine that with the fact that most of the market is
transitioning into another Stage 4 trend and you can start to see how the
pieces are falling together.
"There's going to be a lot of base building since there was a
lot of technical damage done. I've learned to never guess the
bottom."
Again,
don't try and guess the end of a Stage 4 trend. Instead, wait for the
base building, or Stage 1 phase to begin. You don't even want to buy
the Stage 1 either, if you read his book the goal is to buy only after a
Stage 1 breaks out into a Stage 2. The reason is if you buy something
in a Stage 1, it can sit there for an unknown period of time going nowhere
and essentially wasting your time. The two most important assets an
investor has is time and money, so wasting your precious time and buying in a
Stage 1 is not what you want to do. The bottom line is you want to see
all of this in the rear view mirror, the end of the Stage 4 trend and the end
of the Stage 1 base building afterwards. Once you can clearly see all
of that is over with, then it's a much more constructive time to be
participating in the market.
"I have to wait and see the action, I don't want to look ahead
of the action."
The
interviewer asks Weinstein what he's going to buy when all this is over, is
he going to buy back into the blue chip stocks? Weinstein responds by
saying he doesn't know, and wants to see the action in the market first.
If you understand his trading method then you know that what he's
really saying is he's going to wait to see what sets up in a Stage 1 base,
and then breaks out on high volume into a Stage 2 uptrend. He has no
idea what is going to do that ahead of time, so there's no point in trying to
guess. This is an essential point of trend following, or being reactive
to the market versus being proactive and trying to outsmart the market.
Trend followers let the market tell them what to do, and the Stage
Analysis trading method is essentially a trend following method.
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