Stan Weinstein’s concept of stage analysis as outlined in his excellent book entitled Secrets For Profiting In Bull and Bear Markets. I decided to read Mr Weinstein’s book and find out what these stages are. Here is what I discovered:
STAGE 1: This is the basing area where a stock is losing downside momentum. Buyers and sellers are starting to move in equilibrium and although the stock is not taking off it is not selling off either. The buyers are not asking for a discount of the price but are buying what the holders no longer want. This stage could last weeks to months so there is no need to jump in just yet.
STAGE 2: The advancing stage begins when the stock in question starts to break higher from the basing area. This stage usually has a retest to the break-out area before the real move starts. There begins here a pattern of higher lows best described as two steps forward and one step back. These pullbacks provide a good risk/reward opportunity for the astute trader.
STAGE 3: The top area is stage 3 where the good trending stock finds its eventual end. The upward advance loses momentum and consolidation sets in. The mirror image of stage 1 starts to take shape once again. There are sharp moves and high volume in this stage and it is best to refrain from trading here as the reward/risk ratio is stacked against you.
STAGE 4: The declining phase is the fourth and final phase as the factor’s that maintained the stock’s previous momentum are no longer present and the sellers step in. The trader is advised to never go long in this stage or hold on to any winning positions. It is time to exit. If a downtend begins then you can start to look at shorting the stock for the same reasons you went long: trend and momentum.
The market is really very simple in its design and structure; it is the trader who makes it difficult. Although not all markets and stocks are text book examples of the four stages, the disciplined trader would be wise to consider whether or not the stages may be playing out in a current position or one being considered. There may just be a very good reason why both Shannon and Weinstein have best selling books on the same subject.