Stan Weinstein’s “Four Stages” Methods
Stan Weinstein, in Secrets for Profiting in Bull and Bear Markets, provides one of the most complete models for trading long-term trends. The model employs a combination of proven techniques to identify breakouts from a trading range, to follow the progress of a trend and to identify appropriate exit points. It is important to read the book to understand the full model which is briefly summarized below.
The long-term cycle has four distinct stages:
- stage 1 and 3 being trading ranges or reversal patterns; and
- stage 2 and 4 being trends.
- Base or Bottom: The market ranges between support and resistance, after a stage 4 down-trend. The index normally whipsaws around long-term moving averages and there may be clear signs of accumulation, including declining volume on downward movements and increasing volume on rallies.
- Primary up-trend: Stage 2 up-trends follow a breakout from stage 1. The index respects long-term moving averages (from above) and there should be strong volume on rallies and light volume on corrections.
- Top: The market levels off into a trading range after a stage 2 up-trend. The index normally whipsaws around long-term moving averages, with greater volatility than stage 1. A stage 3 top normally continues to show high volume as the market repeatedly attempts to overcome resistance. A dry-up of volume may signal that the trading range will breakout on the upside, reverting back to a stage 2 up-trend.
- Primary down-trend: A stage 4 down-trend follows a break below a stage 3 top. The index respects long-term moving averages (from below), with strong volume on declines and light volume on upward corrections.
Sometimes the market forms a chart pattern, such as a descending or ascending triangle, in place of a rectangular trading range in stages 1 or 3.
The stages are not always as easy to identify as in the above illustration: a trend may last more than a year and a reversal pattern may be over within a week. Up-trends (or down-trends) may also be interrupted by a trading range before continuing the trend.
The model uses moving averages; trendlines; and breakouts above resistance levels to identify the start of a new trend.
30-Week Moving Average
No trades may be entered if price is below the 30-week weighted moving average or if the moving average slopes downwards.
Breakouts must be confirmed by higher than usual volume activity.
Stop loss orders are moved up to below the Low of each successively higher trough in the up-trend or the 30-week MA, whichever is the lower. See Adjusting Stop Levels for details.
If the 30-week MA starts to level out and it appears that the stock is entering a Phase 3 top, then the stops are moved up to below the bottom of each successive trough and the 30-week MA is ignored.
Trailing sell-stops account for most of the exits from the trend. Exit immediately, however, if price falls below the 30-week MA and the MA is no longer rising.
Adjusting Stop Loss Orders
Adjust your stop loss orders, over time, in the direction of the trend being traded:
- In an up-trend move your stop loss up to below the Low of the most recent trough.
- In a down-trend move your stop loss down to above the High of the last peak.
Yahoo is shown with blue line:30-week weighted moving average.
Price breaks above the $3.00 resistance level [R] in June 1997. This is followed by a correction before a second breakout above the resistance which is confirmed by large volume. The entry point is marked by [E] and the 30-week MA is rising strongly.
- Stops (depicted by yellow trendlines below the MA) are adjusted upwards as the trend progresses, but never above the 30-week MA as long as it is rising.
- Price crosses below the MA at [?] but the position is not closed as the MA is still rising.
- The position is stopped out at [X] when price falls below the previous stop level set just below $60.00.
Here is a little quiz for you. Go over BUMI’s chart lowly and please rate which stage rating for BUMI? Post your comment here…