Market Stage Analysis Methodology

Overview

This lecture covers Stan Weinstein's stage analysis trading methodology, focusing on identifying market stages to determine optimal times to buy, sell, or short stocks, emphasizing technical analysis, discipline, and risk management.

Stan Weinstein’s Philosophy

• “Buy low, sell high” is a cliché; professionals buy high and sell higher.
• Consistency and discipline are critical—stick to one good method and avoid switching strategies frequently.
• The market discounts all known information; focus on price and volume, not fundamentals.

Stage Analysis Basics

• Stage analysis identifies four market stages: Stage 1 (base), Stage 2 (uptrend), Stage 3 (top/distribution), Stage 4 (downtrend).
• The 30-week moving average is key for long-term trend recognition; use 10-week for more active trading.
• Trading ranges occur when prices move within set upper and lower boundaries.
• Downtrend: lower highs and lower lows; Uptrend: higher highs and higher lows.

Detailed Stage Descriptions

• Stage 1 (Base): Sideways price action with declining volume; buyers and sellers reach equilibrium.
• Stage 2 (Uptrend): Breakout above resistance on high volume; ideal buy spot, with rising moving average.
• Stage 3 (Top): Price stalls, enters a range with heavy, choppy volume; moving average flattens.
• Stage 4 (Downtrend): Break below support; stock falls, may not require high volume.

Buying & Selling Strategies

• Investors: Buy 80% from Stage 1 breakouts, 20% from Stage 2; enter half at breakout, half on pullback.
• Traders: Buy 80% from Stage 2 continuation patterns, 20% from Stage 1; buy full position at breakout.
• Use buy stop-limit orders to control entry price and risk.

Technical Selection Process

• Analyze from market trend ➔ group trend ➔ individual stock trend (Forest to Trees).
• Favor strong stocks in strong sectors/groups; avoid breakouts in downtrends or weak groups.

Volume, Relative Strength & Resistance

• Breakouts require volume at least 2x average for confirmation.
• Relative strength (RS) should be rising during base formation and breakout.
• Favor setups with minimal overhead resistance; old resistance is less potent.

Selling and Shorting Rules

• Always use protective stops.
• Investors give more room, moving stops up as new highs/lows confirm trend.
• Traders use tighter stops, often under the most recent swing low/high.
• Consider trendline breaks and support/resistance levels for exit.
• Short after a big Stage 2 advance, in Stage 3/4, preferably with a head and shoulders top.

Risk Management

• Accept small losses quickly; never remove stops.
• Portfolio: 5–6 stocks for small accounts, up to 10–20 for larger; diversify across strong groups.

Indicators and Patterns

• Advanced/decline line reveals market breadth and divergences.
• Head and shoulders patterns signal major reversals.

Key Terms & Definitions

• Stage Analysis — Classifying trends as base, uptrend, top, or downtrend to guide trading.
• Relative Strength (RS) — Stock’s price performance vs. index/peers.
• Buy Stop-Limit Order — Order that triggers a buy at a specific price but not above a set limit.
• 30-Week Moving Average — Key trend indicator for Weinstein’s methodology.
• Head and Shoulders Pattern — Chart pattern signaling reversals (top: bearish; bottom: bullish).

Action Items / Next Steps

• Self-assess: Are you an investor or a trader?
• Practice identifying the four market stages on various charts.
• Conduct group and stock technical analysis using stage analysis and RS.
• Review protective stop strategies and implement risk management in your trades.