Stan Weinstein's Classic Tale Of 4 Stage AnalysisHis LifeIt's unanimous. Trader message boards agree. Stan is the man.His book, Stan Weinstein's Secrets For Profiting in Bull and Bear Markets was written in 1988. 20 years later it is still considered a must-have on trader’s bookshelves. Stan Weinstein is the publisher of "Global Trend Alert," an advisory service for institutional investors and “The Professional Tape Reader.” I have no idea if these newsletters still exist. Stan, if you’re reading this, drop me a note and let me know.
When asked why he doesn’t write a follow up to his hugely popular bestseller, he responded with, “I’ve already said all that can be said.” His book doesn’t get hung up with fancy technical indicators. He likes the basics. …some books are so esoteric on technical indicators that only the author and a few academic types can understand them…-- Stan Weinstein All you need to trade like Stan Weinstein is price, volume, Relative Strength, a few trendlines and some moving averages. Oh, and a stock chart wouldn't hurt either.
His LessonsStan Weinstein wants you not to trade on information you read in today’s news. Did Oracle just announce a huge deal with the U.S. government? Sit tight. Do not buy Oracle.The stock market discounts all prices because the professionals are trading on future events, not news that came out today. Trading on events that are happening today, is akin to being late to the party. Investment banks do not pay their research staff millions to give traders today's news. Stan’s four stage analysis method in effect, deciphers the news today as well as events in the future. In other words, discovering what the institutions are doing, without having to know why. Stan Weinstein feels a stock will be in one of the four stages at any time. These stages represent the market cycles of a stock. Your mission is to identify what stage the stock is in and plan accordingly. Stan Weinstein's method is very visual and doesn’t require you to analyze any financial statements. Each stage has its own distinct pattern and is defined by the relationship between buyers & sellers.
The stages are: This phase of a stock’s life cycle occurs after a long price decline or lengthy advance. It’s a consolidation range in which the price will seem to be going nowhere except sideways. This phase can last weeks, months or longer. The price will bounce up to its resistance levels. Sellers will take some profits. The price will drop a bit down to the support and buyers will pick up some shares. During this phase all is quiet on the western front. Average investors are more apt to sell at this point. They feel the stock isn't going anywhere and they want to recoup some money back. If the institutions get wind of good financial prospects their buy orders will begin trickling in. It is by the end of this stage that institutional accumulation has begun. Stan Weinstein says the longer this stage lasts, the longer the next stage lasts. And that’s a good thing. Cause that’s where you lock in the big bucks. The institutions are accumulating more shares. It isn’t that there's a huge increase in buying at the beginning of stage two, it’s that there aren’t many sellers. This stock is still off the average investor’s radar screen. The part that you have to look for is called the Breakout Point (read as buy point). It's identified by: The price breaks above the previous levels of resistance and is now above the 30 week moving average. All this should happen on big volume.
Why does Stan Weinstein pick the 30 week moving average? It works for him. Who am I to argue? He's Stan Weinstein. I'm not. If you go to Yahoo! Finance to find some good news on this stock, you won’t find it. Wall Street has designed the stock market so they make the big money first. You will learn about all the wonderful things this company has done for society after the price increase. The breakout point will be a big clue as to what the Street is planning. Ok, so where was I? The stock is now above the 30 week moving average on big volume and has cleared the line of resistance. This is the beginning of the Advancing Stage. Before the stock begins its climb and right after the first rally, there will probably be at least one pullback. Don’t get shaken. Stan Weinstein claims this is jst another opportunity to buy. The price may pullback to its initial breakout point. The less it touches that point, the more strength the stock is showing. As the stock price builds momentum you still won’t find any good news about it. Wall Street is keeping its mouth shut. The 30 week moving average will begin to slope upwards. On the way to the top the stock will have a series of rallies. Each rally will be higher than the former, and each low will be above the previous. As long as this up and down takes place above the 30 week MA, you’re in good hands. That’s confirmation. This climb can go for a long time. And the beauty of it is, you don’t need to be trading in & out. Sit back and let the buyers push it higher. Let's say it together, "The trend is your friend." The success of this stock will hit the wire and the public will join the party. This is just what Wall Street wanted. Join Upromise for Free! Use Your Credit Card & Get Free Money For College. Yes. Money For College.
All good things must come to an end. But not for you. Cause this is where you sell. Positive news about this stock has hit CNBC, and it’s becoming overpriced. The institutions have figured this out, but the general public is still jumping in. That lovely ascending stock chart now assumes a yoga position known as "plateau." This is where the pros begin to sell. The sells will occur during the rallies so not to depress the price too quickly. Wall Street is holding many shares and must complete the mission. They've already bought low (so have you). Now it's time to sell high. The stock price will be in a tight, slightly volatile range. The buying support will cease and the stock will break below its trading range. Down will come stock price, cradle and all. Once the stock goes below the 30 week MA, cash out and leave the game. One last thing about Stage three. Feel conformable shorting? Once that price crashes through the 30 week MA, you have a perfect opportunity. The odd are in your favor. I have a section on shorting, check it out.
Even though the prices are falling, the average investor continues to buy. They think they’re getting in at a bargain. This just offers more buyers for the institutions to sell to. Upon realizing the price is not increasing, investors who don't have sell rules in place, sit with their shares. The frame of mind changes to "It's gotta go up again." It probably won't. At least not till the next market cycle. As prices drop even further the public will eventually sell in a minor panic. The stock will return to its basing stage like it did in Stage 1. Wall Street realizes it has an undervalued stock on its hands and the cycle of life will begin again. Someone cue The Lion King.
Lets look at a chart:
Some caveats about this chart. I used the 30 day MA instead of the 30 week. That’s what I had access to. The date of this chart is equal to when I wrote the profile. Will this stock go higher? Will it top out and crash? Only time will tell. If you bought NOV at the beginning of February 2007, you would have doubled your money by September 2007.
At the beginning of February the stock breaks through its 30 day MA (I know, I should’ve used the 30 week) on big volume. Around April 20th it retreats back to the 30 day line, and continues to take off. Apparently, its months of smooth sailing up ahead. As I said before, no need to rack up commission charges trading in & out. You would have set up a stop loss to protect yourself on the way up and watch out for crashes below the 30 day MA. This is one of the most sensible ways of making money in the stock market. IMHO of course. About mid-August we break below the 30 day line. Now, that would’ve been a signal to sell. You could have sold a portion of your holdings just to test the situation, or dump everything. As I said, I don’t know if this stock will continue to fly or break down. If it does break down past the 30 day MA, get your shorts on. If you did buy in early February, taking profits in September is not such a terrible thing. I did check the 5 year history of NOV. It did have a Stage four at the end of May 2001. The price dropped 15 points. After a couple ups & downs it went through a Stage one that lasted for over a year. Which lead us to the chart you see above. As I said earlier, I've read only positive things on Stan Weinstein's method and he gets a big thumbs up from me. All I can say at this point...is go get yourself a Stage two!
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