In this article, we dive into the world of Stage Analysis, a proven strategy developed by Stan Weinstein in the 1960s.
Stan developed this methodology after carefully studying the price movements of thousands of stocks and noticed that they shared a cyclical pattern.
The stocks would base, run up, top, and then fall before basing again
Whether you're just starting your trading/investment journey or looking to refine your strategies, this guide is designed to equip you with the tools you need to navigate the market's ups and downs.
Today we'll explore the main four Stages of price action, and how Deepvue can save you time and help you apply Stan's framework.
The Four Stages
Stage Analysis categorizes price movements into four distinct stages.
Stan originally used the 30 week moving average to separate the stages. You can also use the 40 week MA.
On a Daily chart, you can use the 150 day and 200 day MAs to differentiate between stages.
Here's what it looks like on a chart of ZM:
Now let's dive into each of the four stages and what to look for.
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Stage 1: The Basing Area
Stage 1 in Weinstein's Stage Analysis, also known as the Basing Area, is a critical phase in the market cycle.
This stage typically follows a Stage 4 sell-off, where a stock's price has declined and supply-demand dynamics have reached equilibrium, causing the stock to move sideways, often for months.
This sideways movement is indicative of a balance between buyers and sellers, marking the beginning of Stage 1.
In the context of a new Initial Public Offering (IPO), the dynamics are slightly different. After the IPO, it's advisable to wait until there's enough price history to analyze supply and demand and identify key levels.
Often stocks will have an initial run, before basing and starting a IPO Stage 1. Around when the 150 day moving average appears, you can typically start watching for a beginning of Stage 2.
In a more mature stock, Stage 1 starts when the stock's downside momentum slows down and the trend shifts from downwards to sideways.
Key traits of Stage 1 include a balance between buyers and sellers leading to a sideways trend, the stock trading above support and below resistance for a long period, and the 30-week moving average beginning to flatten out.
Stage 1 can last for weeks, months, or in rare cases, years. It's important to focus on stocks that are already in strong Stage 2 Uptrends or nearing a Stage 2A Breakout, rather than wasting time on stocks that are stagnant.
After the stock has based maturely and begun to show promising price action such as large upside reversals or retakes of the 50 sma, it transitions to Stage 1B, where it can be monitored for a potential Stage 2 Breakout.
In conclusion, Stage 1 is a neutral stage where the price oscillates around a flattening 30-week moving average after an advance.
This stage can last for an extended period, and it's crucial to monitor the stock for signs of a potential breakout into Stage 2. During a new bull period, many names form and break out from Stage 1, indicating the start of a new upward trend.
Stage 2: Advance
Stage 2 in Weinstein's Stage Analysis, known as the Advancing Phase, is where the most significant upward movements occur, often leading to substantial profits.
This Stage is characterized by a breakout on high volume through resistance, initiating a trend above a rising 30-week and 40-week moving average. During a Stage 2, the strongest moves occur when the stock is rising above its 50-day moving average / 10-week moving average.
During this uptrend, there will be pullbacks and consolidations, but a strong Stage 2 stock will form consolidations above the moving averages and then break out on large volume once again.
Traders and Investors should focus on stocks just starting their Stage 2 uptrends, or advancing from early consolidations in Stage 2
After the stock has already made a major move, and broken out of multiple bases, it transitions into Stage 2B. This signals that the uptrend may be nearing its end, has less potential and may soon transition to Stage 3.
Stage 3: Topping
Stage 3 in Weinstein's Stage Analysis, known as the Top Area, is a phase where the momentum of a stock's upward trend begins to slow down.
This happens when demand decreases and more supply is brought to the market. As the end of a bull period approaches and a stealth bear market begins to set in, many stocks enter and/or complete Stage 3.
Identifying the transition from Stage 2 to Stage 3 can be subtle. Early warning signs include the stock slicing below the 10-week or 50-day moving average on heavy volume.
Another indicator is erratic price action with wild swings to both the upside and downside, which suggests aggressive selling by longer-term holders to late-joining market participants. This type of price movement, known as churning, is characterized by the stock moving sideways on heavy volume.
The slope of the 30-week or 150-day moving average, as well as the 40-week or 200-day moving average, will begin to flatten and slow its advance, indicating the stock's entry into Stage 3.
Both traders and investors should approach this stage with caution, ready to reduce their positions or exit the stock.
Stage 4: Decline
Stage 4 in Weinstein's Stage Analysis, known as the Declining Phase, is essentially the opposite of a Stage 2 Advancing Phase. During a bear period, many stocks enter and remain in Stage 4 for the duration of the bear period.
This stage is characterized by the stock breaking below the support level formed during Stage 3 and beginning a downtrend below what will eventually become declining long-term moving averages.
During Stage 4, stocks often make lower highs and lower lows until the downward momentum slows and the stock begins the Stage 1 bottoming process.
Stage 4 Downtrends can last for months, and in some rare cases even years. It's crucial to remember not to try to pick the bottom until a valid Stage 1 base forms, as stocks can continue to fall significantly during this stage.
Stage 4 downtrends are the most dangerous time to be involved on the long side. Traders and investors should promise themselves never to buy or hold onto any stocks once they move into Stage 4.
After Stage 4, the stock will transition back into Stage 1, repeating the cycle.
Stage Analysis using Deepvue
Deepvue makes it easy to apply Stage Analysis and trade like Stan. You can screen and sort by the Stage of the stock, and visualize the stages on charts using our proprietary Stage Analysis Indicator.
The logic for the indicator was built based on hours of conversations with Stan himself.
Next, you can easily see the Stage Analysis Stage any stock is in. You can add this data point as a column in your Data Columns or you can set it up in your Data Panel.
You can also screen for stocks in a particular Stage, here is an example that looks for strong stocks in Stage 2 that are in a top industry group.
You can also screen for Stage 2 breakouts using this screen. It looks for stocks that just entered stage 2 with a strong weekly closing range on huge volume.
In the moment as a stock is breaking out you can also use the volume run rate data point to judge if the volume will be above average for that day.
In conclusion, Stage Analysis is a powerful tool for understanding the cyclical nature of the stock market and making informed investment and trading decisions.
Deepvue's advanced tools, including the Stage Analysis Indicator and Stock Screener, make it easier than ever to apply this methodology in real-time.
Frequently Asked Questions (FAQs)
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