Stage
Analysis is a strategy for longer term trend trading. It was created by
Stan Weinstein and discussed in the book Secrets
for Profiting in Bull and Bear Markets. Stage Analysis uses chart patterns to describe four distinct stages that a particular
trade can be in. The stage, and transitions between stages, have
specific guidelines for whether a trader should buy, sell, or hold the
trade. This creates a simple strategy to follow when trading the
market. Stage Analysis also helps traders identify and stay invested in
long term trends in the market.
Weekly Stock Chart – Weekly charts are
used in Stage Analysis since the system is designed to be for longer term
trading, from weeks to months to years at a time. Stage Analysis is
definitely not a system for day trading.
30-Week Moving Average – The price action
on the weekly chart is compared in relation to the 30-week moving average in
order to determine the specific stage in Stage Analysis. Whether the
weekly price and the 30-week moving average are trending higher, lower, or
sideways determines the specific stage.
Volume – A key component of the
transition from a Stage 1 base to a Stage 2 advance is big increase in volume
on the breakout. Without a big increase in volume the breakout is more
vulnerable to being a false breakout, and the market moving back down into a
Stage 1 base.
Stock Market Indexes – The current stage
of the overall stock market is extremely important when determining how much
money to trade in the market and whether to even trade at all, or to stay in
cash. When the overall market is in a Stage 4 decline, most stocks will
also be in a Stage 4 decline and that is a period where a trader should play
it safe instead of facing potentially devastating losses in the market.
Source:
Secrets for Profiting In Bull and Bear Markets By Stan Weinstein
The
following discussion describes each stage in Stage Analysis, including
examples from charts. Actions to be taken during each Stage are also
discussed. For a more in depth discussion of Stage Analysis be sure to
check out Stan
Weinstein’s book.
The
stock forms a long horizontal base on the chart. A base is simply a
period where the stock moves mostly sideways instead of trending higher or
lower. The base forms after a decline in the stock price. The longer
the horizontal base the better. A long base will establish a more
significant support level, and the ownership of the stock will transfer from
weak hands to strong hands. The price action in the stock usually
oscillates above and below the 30-week moving average while forming the
horizontal base.
1)
Create a list of stocks in this stage, and set price levels where they
would likely breakout into a Stage 2 advance.
2)
Take a look at the sector the stock is in and see if the entire sector
is also in the same stage. This will validate the breakout into Stage 2
if the entire sector moves with the stock.
3)
Look for increased volume as the stock approaches the breakout level.
4)
Do not look to take a position in stocks in this stage until the
breakout into Stage 2 occurs. The reason is the stock can continue to
be in the Stage 1 base for months to years at a time. Your capital will
be tied up in a stock that is going nowhere if the stock stays in Stage 1 for
a long period of time.
After a
decline, Caribou Coffee (CBOU) formed a long base that oscillated between
$1.25-$3.25. Notice how the 30-week moving average flattened out
towards the end of the base.
After
declining during the 2008 bear market, Ford (F) formed a horizontal base that
ranged from about $1-$3.
The
stock breaks out of the horizontal base and begins advancing over a period of
time. The breakout needs to occur on increased volume, otherwise it
might not be sustainable. The stock should also break above the 30-week
moving average during the breakout. While the stock moves higher, most of the
advance should occur above a rising 30 week moving average.
1)
The stock should be bought on the breakout or on a pullback to the
breakout level.
2)
The stock should be held until a Stage 3 top forms or a trailing stop
is hit.
3)
Trail a stop for risk management purposes. For example you can
use the 30-week moving average as an area to trail a stop loss under.
4)
Can also add to a long running winner in this stage as long as the
uptrend continues.
Caribou
Coffee (CBOU) from the previous example broke out of the Stage 1 base on a
huge increase in volume. From the breakout point the stock continued to
trend higher above the 30-week moving average.
Ford
Motor (F) from the previous example broke out of its Stage 1 base on a big
increase in volume and continued to trend higher above the 30 week moving
average.
The
stock starts to trend sideways in Stage 3 and lose momentum to the
upside. The 30- week moving average also loses its upward slope and
starts moving sideways. The price action in the stock usually occurs
much more above and below the flattened 30 week moving average than it did in
Stage 2. The stock will either breakdown into a Stage 4 decline after
this stage, or after a consolidation break back into another Stage 2 advance.
1)
Wait for a Stage 4 breakdown to sell the stock, or just sell the stock
in this stage if the technical action starts to form a significant top.
2)
If the stock happens to break back into a Stage 2 advance, buy the
stock back or add more shares if they still hold the position.
Starbucks
(SBUX) formed a Stage 3 top after advancing for a period of time. The
30-week moving average flattened out in 2006 and the stock began oscillating
above and below the moving average.
Citigroup
(C) formed a Stage 3 top in 2007 when the 30-week moving average flattened
out. The price of the stock moved above and below the flattened 30-week
moving average during this time.
The
stock breaks down below Stage 3 trading range and below the 30-week moving
average in Stage 4, and continues to decline mostly below the 30 week moving
average. The 30-week moving average begins a long slope downward.
1)
Sell positions during the transition into this stage, since they can
lose considerable value if held during a steep decline
2)
Stay out of all stocks in this phase
Starbux
(SBUX) from the previous example permanently broke down below the Stage 3
consolidation in early 2007 and began a long term decline.
Citigroup
(C) broke down below the 30-week moving average in the middle of 2007, then
retested the 30-week moving average and failed to move back above it in
October 2007. The 30-week moving average then began sloping downward
and the stock began a long Stage 4 decline.
Since
the majority of stocks rise and fall along with the rest of the stock market,
it is very important to know the stage the major market indexes are in.
Most stocks will trend along with the rest of the market. If the major
indexes are in a Stage 2 advance, you can expect the majority of stocks to
also be in a Stage 2 advance. The most important thing to keep an eye
on is when the overall market transitions into a Stage 4 decline. Since
most stocks will be declining along with the rest of the market at that point
it would be prudent to get out of long positions and stay conservative while
the market declines.
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