Stan Weinstein's Stage Analysis
A Complete Guide to the Four Stages of Every Stock's Lifecycle
Introduction — Who Is Stan Weinstein?
Stan Weinstein is a legendary market technician and newsletter publisher who distilled decades of market observation into one of the most practical and enduring books on technical analysis ever written: "Secrets for Profiting in Bull and Bear Markets", published in 1988. Despite being nearly four decades old, the book remains a cornerstone of trend-following methodology and is widely considered one of the best introductions to systematic stock analysis ever produced.
Weinstein served as the editor of The Professional Tape Reader, a highly respected technical newsletter, for over 20 years. His approach was built not on academic theory but on hard-won pattern recognition — watching thousands of stocks move through the same repeatable lifecycle over and over again.
Why Stage Analysis Is Timeless
Markets change. New instruments emerge — ETFs, crypto, derivatives. Algorithms now dominate order flow. Information moves at the speed of light. Yet the fundamental dynamic that drives stage analysis remains exactly the same: human psychology and the interaction between informed institutional money and uninformed retail money.
Every stock, in every market, in every era, moves through the same four stages:
- Basing (Accumulation) — Smart money quietly builds positions
- Advancing (Markup) — The trend takes off, everyone sees it
- Topping (Distribution) — Smart money exits, selling to latecomers
- Declining (Markdown) — The trend collapses, retail holds and hopes
This cycle repeats endlessly because it is rooted in the unchanging nature of crowd behavior — fear, greed, hope, denial.
The Core Principle
Weinstein's message is brutally simple:
You should only own stocks in Stage 2 (advancing) and only short stocks in Stage 4 (declining). Everything else is wasted time, wasted capital, and unnecessary risk.
This single idea, properly executed, eliminates the vast majority of losing trades. Most traders lose money because they buy in Stage 3 (the top) or hold through Stage 4 (the decline). Stage analysis gives you an objective, repeatable framework to avoid these catastrophic mistakes.
What Makes Stage Analysis Different
Unlike many technical approaches that rely on complex indicators, Fibonacci levels, or wave counting, stage analysis requires only three things:
- A weekly price chart (not daily — weekly)
- The 30-week moving average (Weinstein's signature indicator)
- Volume bars
That's it. No oscillators, no Bollinger Bands, no MACD crosses. Just price, one moving average, and volume. The simplicity is its strength — there is very little room for subjective interpretation.
The Four Stages — Overview
Every stock, index, commodity, and cryptocurrency moves through these four stages in sequence. The stages can last weeks, months, or even years, but the sequence never changes. Stage 1 always leads to Stage 2, which always leads to Stage 3, which always leads to Stage 4, which always leads back to Stage 1.
THE FOUR STAGES OF EVERY STOCK'S LIFECYCLE
Price ($)
│
│ STAGE 3
│ ┌─ DISTRIBUTION ─┐
│ ╱ (Topping) ╲
│ ╱ ╱╲ ╱╲ ╱╲ ╲
│ ╱ ╱ ╲ ╱ ╲ ╱ ╲ ╲
│ STAGE 2 ╱ ╱ ╲ ╲╱ ╲ ╲ STAGE 4
│ ADVANCING╱ ════════ ╲ DECLINING
│ ╱ ╱ 30-week MA flattens ╲
│ ╱ ╱ ╲
│ ╱ ╱ ╲ ╱╲
│ ╱ ╱ ╲ ╱ ╲
│ ╱ ╱ ╲ ╲
│ ╱ ╱ ← 30-week MA rising ╲ ╲
│ ╱╱ ╲ ╲
│ ╱╲ ╱╱ 30-week → ╲ ╲
│ ╱ ╲ ╱╱ BREAKOUT MA falling ╲ ╲
│ ╱ ╳ ↑ on HIGH ╲
│ ╱ ╱ ╲╱ volume ╲ ╱╲
│╱ ╱ ╲╱ ╲
│══════════ ╲
│ STAGE 1 ╲
│ BASING / ACCUMULATION BREAKDOWN ╲
│ (30-week MA flat) on HIGH vol ╲
│ ╲
├─────────────────────────────────────────────────────────────────────────→
│ Time (weeks/months)
│
Vol │ ░░░░░░ ████░░░░ ░██ ░██░░░ ░░░░████
│ LOW VOL HIGH VOL MIXED VOL PANIC VOL
└─────────────────────────────────────────────────────────────────────────→
Quick Reference — The Four Stages
| Stage | Name | 30-Week MA | Price vs MA | Volume | Action |
|---|---|---|---|---|---|
| Stage 1 | Basing / Accumulation | Flat (after declining) | Oscillates around MA | Drying up | Watch and wait |
| Stage 2 | Advancing / Markup | Rising | Above MA, using it as support | Expands on breakout | BUY |
| Stage 3 | Topping / Distribution | Flattening (after rising) | Oscillates around MA | Mixed/divergent | SELL |
| Stage 4 | Declining / Markdown | Falling | Below MA, MA acts as resistance | Increases on breakdowns | SHORT or AVOID |
The 30-Week Moving Average — Weinstein's Key Indicator
The 30-week moving average is the single most important tool in Weinstein's methodology. It is the backbone of stage analysis. Every decision — buy, sell, hold, short — revolves around the relationship between price and this one line.
Why 30 Weeks Specifically?
Weinstein chose the 30-week moving average (which is approximately equal to the 150-day moving average on a daily chart) for several reasons:
- It smooths out noise without excessive lag. Shorter MAs (10-week, 20-week) whipsaw too much. Longer MAs (40-week, 50-week) are too slow to signal stage changes.
- It captures the intermediate trend. The 30-week MA represents roughly 6 months of price data — enough to filter out short-term volatility but responsive enough to reflect genuine trend changes.
- Institutional investors watch this level. Large funds often use the 150-day (30-week equivalent) as a key decision level.
- It works across all markets. Weinstein tested this across decades of stock market data, and traders since have confirmed its effectiveness in commodities, forex, and crypto.
How to Read the 30-Week MA
The 30-week MA tells you three things. You must check all three every time you look at a chart:
1. The Slope (Direction)
| Slope | Meaning | Implication |
|---|---|---|
| Rising | Trend is up, buyers in control | Only look for LONGS |
| Flat | Trend is transitioning | Wait for clarity — Stage 1 or Stage 3 |
| Falling | Trend is down, sellers in control | Only look for SHORTS (or stay out) |
2. Price Position Relative to MA
| Position | Meaning |
|---|---|
| Price above a rising MA | Healthy Stage 2 uptrend — hold longs |
| Price oscillating around a flat MA | Stage 1 (base) or Stage 3 (top) |
| Price below a falling MA | Stage 4 decline — avoid or short |
| Price touching a rising MA from above | Potential pullback buy in Stage 2 |
| Price touching a falling MA from below | Potential short entry in Stage 4 |
3. The MA as Dynamic Support and Resistance
STAGE 2 — MA acts as SUPPORT STAGE 4 — MA acts as RESISTANCE
Price 30-week MA
│ ╱╲ ╱╲ ╱╲ ════════════╲
│ ╱ ╲ ╱ ╲ ╱ ╲ ╱╲ ╲════════
│ ╱ ╲ ╱ ╲ ╱ ╲ ╱ ╲ ╱╲ ╲
│ ╱ ╳ ╳ ╲ ╱ ╲ ╱ ╲ ╱╲ ╲
│╱ ╱ ╲ ╱ ╲ ╲ ╱ ╳ ╲ ╱ ╲ ╲
│════╱═════╲╱══════╲═════ ╱ ╱ ╲ ╳ ╲ ╲
│ ╱ 30-week MA ╲ ╱ ╲ ╱ ╲ ╲
│ ╱ (rising = support) ╲ ╲ ╲
│ Price bounces DOWN off MA
│ Price bounces UP off MA (falling = resistance)
In Stage 2, the 30-week MA acts like a floor. When price pulls back to it, buyers step in, and the stock bounces higher. Each successful test of the MA confirms the uptrend is healthy.
In Stage 4, the exact opposite happens. The 30-week MA acts like a ceiling. When price rallies back to it, sellers overwhelm buyers, and the stock resumes its decline. Each failed rally at the MA confirms the downtrend.
Setting Up the 30-Week MA on Your Chart
- Use a weekly chart — Weinstein's method is designed for weekly timeframes
- Add a 30-period Simple Moving Average (SMA) — Not EMA, not WMA. A simple moving average.
- If your platform only shows daily charts, use a 150-day SMA as the equivalent
- Make the line prominent — you will reference it constantly
Stage 1: Basing Area (Accumulation) — Deep Dive
Stage 1 is the foundation upon which every major advance is built. It is the quiet, boring, often ignored phase where smart money — institutions, hedge funds, informed investors — quietly accumulates shares from discouraged holders who have given up after the Stage 4 decline.
STAGE 1: BASING / ACCUMULATION
Price ($)
│
│
│
│ ─────────────── Resistance (ceiling) ───────── ──────
│ ╱╲ ╱╲ ╱╲ ╱╲ ╱╲
│ ╱ ╲ ╱ ╲ ╱ ╲ ╱ ╲ ╱ ╲
│ ═══╱════╲═══╱════╲════╱════╲══╱════╲═══╱════╲══ ← 30-week MA
│ ╱ ╲ ╱ ╲ ╱ ╲╱ ╲ ╱ ╲ (FLAT)
│ ╱ ╳ ╲╱ ╲ ╳ ╲
│ ─────────────── Support (floor) ────────────────
│
│
├────────────────────────────────────────────────────→ Time
│
Vol │ ██ ░█ ░░ ░░ ░░ ░░ ░░ ░░ ░░ ░█ ██
│ Volume gradually DECREASES (disinterest)
│ until late in Stage 1 when it may pick up
└────────────────────────────────────────────────────→
Characteristics of Stage 1
| Characteristic | What You See |
|---|---|
| Price action | Sideways, range-bound between support and resistance |
| 30-week MA | Flat — no longer declining (it was falling during Stage 4) |
| Price vs MA | Price oscillates above and below the flat MA repeatedly |
| Volume | Generally low and declining — nobody cares about the stock |
| Duration | Weeks, months, sometimes years for major bases |
| Media/sentiment | Stock is forgotten, analysts have stopped covering it |
| Who is buying | Institutions — quietly, in small amounts, over long periods |
| Who is selling | Discouraged former holders from the Stage 4 decline |
What Is Happening Behind the Scenes
During Stage 1, a critical transfer of ownership is taking place. Weak hands (retail traders who bought during Stage 2 or Stage 3 and held through the entire Stage 4 decline) are finally capitulating. They sell to strong hands (institutions with longer time horizons and better information).
This process takes time because institutions cannot buy millions of shares all at once — that would push the price up prematurely. Instead, they buy gradually, absorbing every piece of supply that comes to market while keeping the price flat.
The longer Stage 1 lasts, the more shares change hands from weak to strong holders. This is why longer bases often lead to more powerful Stage 2 advances — the supply overhang has been thoroughly absorbed.
How to Identify Stage 1 Early
- Look for stocks that have been in Stage 4 (declining) and have stopped going down. The first clue is that the price stops making new lows.
- Watch the 30-week MA. When it stops declining and begins to flatten, Stage 1 has begun.
- Notice the volume pattern. Volume should be drying up. This shows disinterest, which is exactly what you want — it means the selling pressure is exhausting itself.
- Identify the range. Mark the support (floor) and resistance (ceiling) of the base. These levels will become critically important for the Stage 2 breakout.
What NOT to Do in Stage 1
- Do NOT buy yet. Stage 1 is a WAITING stage. The stock is going nowhere, and your capital is dead money while it sits in a base.
- Do NOT try to pick the bottom. You cannot know how long Stage 1 will last. Some bases last for years.
- DO add it to your watchlist. Stage 1 is where you build your shopping list for future Stage 2 breakouts.
Stage 1 Identification Checklist
| Criteria | What to Confirm | Check |
|---|---|---|
| ☐ | Stock has been declining (Stage 4) and has stopped making new lows | ☐ |
| ☐ | Price is trading sideways in a defined range | ☐ |
| ☐ | 30-week MA has flattened (no longer declining) | ☐ |
| ☐ | Price is oscillating above and below the flat 30-week MA | ☐ |
| ☐ | Volume is low and/or declining (disinterest) | ☐ |
| ☐ | Clear support (floor) and resistance (ceiling) can be drawn | ☐ |
| ☐ | Stock has been in this range for at least several weeks | ☐ |
Stage 2: Advancing — The Money-Making Stage — Deep Dive
Stage 2 is where all the money is made on the long side. This is the ONLY stage where you should be buying stocks. Every other stage is either too early (Stage 1), too late (Stage 3), or dangerous (Stage 4).
When a stock transitions from Stage 1 to Stage 2, it is one of the most powerful and reliable technical signals in all of market analysis. The base has been built, supply has been absorbed, and the stock is ready to advance.
STAGE 2: ADVANCING / MARKUP
Price ($)
│ ╱╲
│ ╱ ╲
│ ╱╲ ╱ ╲ ╱
│ ╱ ╲ ╱ ╲╱
│ ╱╲ ╱ ╲ ╱
│ ╱ ╲ ╱ ╲╱
│ ╱╲ ╱ ╲ ╱ ← Pullbacks to
│ ╱ ╲ ╱ ╲╱ rising 30-week MA
│ ╱╲ ╱ ╲ ╱ = continuation buys
│ ╱ ╲ ╱ ╲╱
│ ╱ ╲ ╱ ╱
│ ╱ ══╳══════╱═══════════════════ ← 30-week MA (RISING)
│ ╱ ╱ ╲ ╱╱
│══╱══╱═══════╲╱╱═══ ← MA was flat, now turning UP
│ ╱ ╱ ╱
│╱ ╱ BREAKOUT above resistance
│──────── ← Former resistance (now support)
│ STAGE 1 BASE
├────────────────────────────────────────────────────→ Time
│
Vol │ ░░░░░░████░░█░░█░░█░░░██░░░░██░░░░░░░░░░░░
│ ↑ HIGH volume on breakout
│ Then normal volume during advance
└────────────────────────────────────────────────────→
The Breakout — The Most Important Moment
The transition from Stage 1 to Stage 2 is marked by a breakout. This is the moment when price moves decisively above the resistance (ceiling) of the Stage 1 base. But not every move above resistance qualifies as a genuine breakout. Weinstein requires all three conditions to be met:
The Three Breakout Conditions:
| Condition | Requirement | Why It Matters |
|---|---|---|
| 1. Price | Closes above the resistance of the Stage 1 base on a weekly chart | Proves buyers have overwhelmed the supply at resistance |
| 2. Volume | Breakout week shows significantly above-average volume (at least 2x normal) | Confirms institutional participation — they are buying aggressively |
| 3. 30-week MA | The MA must be flattening or beginning to turn up | Confirms the intermediate trend is shifting from neutral to bullish |
If any one of these three conditions is missing, the breakout is suspect and may fail. All three together create a high-probability entry.
ANATOMY OF A STAGE 2 BREAKOUT
Price ($)
│
│ ╱╲
│ ╱ ╲╱╲
│ ╱ ╲
│ ╱
│ ╱
│ ╱╲ ╱╲ ╱ ← BREAKOUT CANDLE (high volume)
│ ══════╱══╲═══╱══╲═╱════════════════ ← Resistance level
│ ╱ ╲ ╱ ╳ (becomes support after break)
│ ════╱══════╳════╱═╲════════════ ═══ ← 30-week MA (flattening
│ ╱ ╱ ╲ ╱ ╲ → turning up)
│ ╱ ╱ ╲╱
│───╱───╱───────────────── Support
│ ╱ ╱
│ ╱ ╱
├────────────────────────────────────→ Time
│
Vol │ ░░ ░░ ░░ ░░ ░░ ░░ ████ ░░ ░░
│ ↑
│ VOLUME SURGE on breakout
│ (at least 2x average)
└────────────────────────────────────→
The Ideal Buy Point
Weinstein identifies two primary entry points in Stage 2:
Entry 1: The Breakout Buy
This is the initial purchase when the stock breaks out of its Stage 1 base on high volume with a rising or flattening MA. This is the most aggressive entry and offers the best risk/reward because you place your stop just below the base.
- Buy: When price closes above Stage 1 resistance on weekly chart
- Confirmation: Volume is at least 2x the average weekly volume
- 30-week MA: Flat or turning up
- Stop loss: Below the Stage 1 support (floor of the base) or below the 30-week MA
Entry 2: The Continuation Buy (Pullback to Rising MA)
After the initial breakout, stocks often pull back to test the breakout level and/or the rising 30-week MA. This pullback is a second chance entry and is often less risky because the breakout has already been confirmed.
- Buy: When price pulls back to the rising 30-week MA and bounces
- Confirmation: The pullback occurs on decreasing volume (healthy)
- Confirmation: The bounce occurs on increasing volume (demand returning)
- Stop loss: Below the 30-week MA
THE CONTINUATION BUY — PULLBACK TO RISING MA
Price ($)
│
│ ╱╲
│ ╱ ╲ ╱╲
│ ╱ ╲ ╱ ╲
│ ╱ ╲ ╱ ╲ ╱
│ ╱ ╲ ╱ ╲ ╱
│ ╱ ╲ ╱ ╲ ╱
│ ╱ ══╲╱══════════╲╱══════ ← Pullback touches
│ ╱ ╱ ╲ ╱ rising 30-week MA
│ ╱ ╱ ↑ ╱ = BUY ZONE
│ ╱ ╱ Pullback ╱
│ ╱ ╱ on LOW vol ╱
│╱ ╱ ╱
├────────────────────────────────────→ Time
│
Vol │ ████ ░░ ░░ ░░ ██ ░░ ░░ ██ ░░
│ ↑ ↓ ↑
│ Breakout Low Bounce
│ volume vol volume
└────────────────────────────────────→
How to Ride Stage 2 Trends
Once you are in a Stage 2 position, the goal is to ride the trend for as long as possible. This is where most traders fail — they sell too early, taking small profits while the stock continues to advance for months or years.
Weinstein's solution is simple: use the 30-week MA as your trailing stop.
Rules for Riding Stage 2:
- As long as price remains above the rising 30-week MA, hold the position. Ignore short-term pullbacks, scary headlines, and temporary volatility.
- The 30-week MA must remain in an uptrend (rising slope). If it begins to flatten, be alert — Stage 3 may be approaching.
- Pullbacks to the MA on low volume are healthy. They allow the stock to "refresh" before the next advance.
- Pullbacks that breach the MA on high volume are warning signs. One breach does not necessarily end Stage 2, but it demands heightened vigilance.
Trailing Stop Strategy:
| Method | How It Works | Best For |
|---|---|---|
| Close below 30-week MA | Exit if the weekly close is below the 30-week MA | Conservative — protects profits |
| Close below 30-week MA + 2 weeks confirmation | Exit only if price stays below MA for 2 consecutive weeks | Moderate — avoids whipsaws |
| Percentage below 30-week MA | Exit if price closes more than 3-5% below the MA | Aggressive — gives maximum room |
Signs That Stage 2 Is Maturing
No trend lasts forever. As Stage 2 progresses, look for these warning signs that the advance is losing steam:
- The angle of ascent decreases. Early Stage 2 often shows steep advances. Late Stage 2 shows shallower rallies.
- Pullbacks become deeper. In early Stage 2, pullbacks barely touch the MA. In late Stage 2, they may slice through it briefly.
- The 30-week MA begins to flatten. This is the earliest warning that Stage 3 is approaching.
- Volume increases on down weeks. When selling volume starts to match or exceed buying volume, distribution may be starting.
- New highs are made on lower volume. Bullish enthusiasm is waning even as price pushes higher — a classic divergence.
- The stock falls behind its sector or the market. Relative strength deterioration (covered in detail later) is an early red flag.
Stage 2 Identification Checklist
| Criteria | What to Confirm | Check |
|---|---|---|
| ☐ | Price has broken above Stage 1 resistance on a weekly closing basis | ☐ |
| ☐ | Breakout occurred on high volume (at least 2x average) | ☐ |
| ☐ | 30-week MA is rising (or at minimum, has flattened and is turning up) | ☐ |
| ☐ | Price is above the rising 30-week MA | ☐ |
| ☐ | Pullbacks to the MA occur on low volume and are followed by bounces | ☐ |
| ☐ | Higher highs and higher lows are visible on the weekly chart | ☐ |
| ☐ | Relative strength vs the market is positive or improving | ☐ |
Stage 3: Topping Area (Distribution) — Deep Dive
Stage 3 is the most deceptive and dangerous stage for the average investor. It is where the narrative around a stock is usually the most bullish — earnings are strong, analysts are upgrading, the media is writing glowing profiles, and everyone "knows" the stock is a winner. It is precisely at this moment of maximum optimism that smart money is selling.
STAGE 3: TOPPING / DISTRIBUTION
Price ($)
│
│ ╱╲ ╱╲
│ ╱ ╲ ╱╲ ╱ ╲ ╱╲
│ ╱ ╲ ╱ ╲ ╱ ╲ ╱ ╲
│ ╱ ╲╱ ╲ ╱ ╲ ╱ ╲
│ ╱ ╲ ╲ ╱ ╲ ╱ ╲
│╱ ╲ ╳ ╳ ╲
│ ══════════════════════════════════════╲═══ ← 30-week MA
│ ╲ (FLATTENING)
│ ─── Resistance tested multiple times ─╲──
│ ╲
│ ─── Support tested multiple times ──────╲
│ ╲
│ BREAKDOWN
│ (Stage 4 begins)
├────────────────────────────────────────────────→ Time
│
Vol │ ░░██░░██░░██░░██░░░░██████░░░░████████
│ ↑ ↑ ↑
│ High volume on Heavy volume on
│ DOWN weeks the breakdown
│ (distribution)
└────────────────────────────────────────────────→
How to Spot the Transition from Stage 2 to Stage 3
The shift from Stage 2 to Stage 3 is gradual, not sudden. It does not happen in a single week. Here are the sequential warning signs:
Warning Sign 1: The 30-week MA begins to flatten. After rising steadily throughout Stage 2, the MA's slope decreases. It has not turned down yet, but it is no longer rising with conviction. This is the first structural change.
Warning Sign 2: Price starts moving sideways instead of up. Instead of making higher highs, the stock begins to oscillate in a range. It may still touch its former highs, but it cannot sustain the advance.
Warning Sign 3: Volume increases on declining weeks. In a healthy Stage 2, volume is higher on up weeks and lower on down weeks. In Stage 3, this pattern reverses. Heavy selling on down weeks is the footprint of institutional distribution.
Warning Sign 4: Price begins to oscillate around the 30-week MA. In Stage 2, the stock stays above the MA. In Stage 3, it repeatedly crosses above and below the flattening MA — just like Stage 1, but at the TOP of the move instead of the bottom.
Warning Sign 5: The stock fails to make new highs. Each rally attempt falls short of the previous high. This creates a pattern of lower highs within the range — a bearish structure hidden within what appears to be sideways action.
Why Most Retail Traders Buy in Stage 3
This is one of the most important lessons in all of stage analysis. The reason most retail traders lose money is that they buy in Stage 3 — the absolute worst time. Here is why:
-
The story is most compelling. After a long Stage 2 advance, the company's fundamentals look outstanding. Earnings are at peak levels. The media and analysts are overwhelmingly positive. The stock "looks" like a great investment.
-
Social proof is strongest. Everyone who bought in Stage 2 has made money. Friends, neighbors, and social media influencers are bragging about their gains. FOMO drives latecomers to buy.
-
The chart "looks good" to untrained eyes. To someone who does not understand stage analysis, a stock in Stage 3 appears to be just "taking a breather" before continuing higher. The base looks like "consolidation" rather than distribution.
-
Wall Street is promoting it. Analyst upgrades and price target increases peak during Stage 3 — because institutional clients need someone to sell to.
The cruel irony: the moment everything feels safest and most obvious is precisely when the risk is highest.
The Importance of SELLING When Stage 3 Is Confirmed
Weinstein is unequivocal: when Stage 3 is confirmed, you must sell your long position. Not reduce it. Not hedge it. Sell it.
Most investors resist this advice because:
- "It might go back up" (hope)
- "I'll sell when it gets back to the highs" (anchoring)
- "The fundamentals are still good" (narrative bias)
- "I don't want to pay taxes on my gains" (tax tail wagging the investment dog)
None of these are valid reasons to hold a Stage 3 stock. The transition from Stage 3 to Stage 4 can be devastating — declines of 30%, 50%, or even 80% are common when former market leaders enter Stage 4.
Stage 3 Identification Checklist
| Criteria | What to Confirm | Check |
|---|---|---|
| ☐ | Stock has had a significant Stage 2 advance prior to this phase | ☐ |
| ☐ | 30-week MA has flattened (no longer rising) | ☐ |
| ☐ | Price is oscillating above and below the flat 30-week MA | ☐ |
| ☐ | Price is failing to make new highs | ☐ |
| ☐ | Volume is heavier on down weeks than on up weeks | ☐ |
| ☐ | A clear support and resistance range has formed | ☐ |
| ☐ | Sentiment and media coverage are overwhelmingly bullish | ☐ |
| ☐ | Relative strength vs the market is deteriorating | ☐ |
Stage 4: Declining — The Danger Zone — Deep Dive
Stage 4 is the mirror image of Stage 2. Where Stage 2 is the only stage to own stocks, Stage 4 is the stage where you must absolutely not hold any long positions. Stage 4 destroys wealth more efficiently than any other market environment because it feeds on hope, denial, and anchoring bias.
STAGE 4: DECLINING / MARKDOWN
Price ($)
│
│ STAGE 3 TOP
│ ╱╲ ╱╲
│ ╱ ╲ ╱ ╲
│╱ ╲╱ ╲╱ ← BREAKDOWN below support on high volume
│══════════════╲════════════════════ ← 30-week MA (FALLING)
│ ╲ acts as RESISTANCE
│ ╲ ╱╲
│ ╲╱ ╲ ← Rally attempts fail at
│ ╲ the falling 30-week MA
│ ╲ ╱╲
│ ╲╱ ╲
│ ╲
│ ╲ ╱╲
│ ╲╱ ╲ ← Each rally weaker
│ ╲
│ ╲ ╱╲
│ ╲╱ ╲
│ ╲ ← Capitulation
│ ╲ (Stage 4 ends,
│ ╲ Stage 1 begins)
├────────────────────────────────────────────────→ Time
│
Vol │ ░░░░████░░░░░░██░░░░░░██░░░░░░████████████
│ ↑ ↑
│ Breakdown Capitulation
│ volume (panic selling)
└────────────────────────────────────────────────→
The Breakdown Signal
The transition from Stage 3 to Stage 4 is marked by a breakdown — the bearish counterpart of the Stage 2 breakout. The breakdown occurs when:
| Condition | Requirement |
|---|---|
| Price | Closes below the support of the Stage 3 range on a weekly chart |
| Volume | Breakdown occurs on heavy volume (institutional selling) |
| 30-week MA | Has flattened and is beginning to turn down (or already declining) |
This is a sell signal for any remaining longs and a potential short entry for experienced traders.
Why You MUST Stay Out of Stage 4 Stocks
The mathematics of loss recovery makes Stage 4 devastating:
| Loss | Recovery Needed to Break Even |
|---|---|
| -10% | +11.1% |
| -20% | +25.0% |
| -30% | +42.9% |
| -40% | +66.7% |
| -50% | +100.0% |
| -60% | +150.0% |
| -70% | +233.3% |
| -80% | +400.0% |
A stock that falls 50% must then double just to get back to where it started. A stock that falls 75% must quadruple. These recoveries take years, if they happen at all.
The most common excuses for holding Stage 4 stocks:
| Excuse | Reality |
|---|---|
| "It's cheap now — great value!" | Cheap can always get cheaper. A $100 stock that falls to $50 is not "cheap" — it's in a downtrend. |
| "The fundamentals are still strong" | Fundamentals lag price. By the time the fundamentals deteriorate, the stock has already fallen substantially. |
| "I'm a long-term investor" | Stage 4 can last 1-3 years. That's a long time to lose money. |
| "It'll come back" | Some stocks never come back. Ask holders of Enron, WorldCom, Lehman Brothers, or countless others. |
| "I can't sell at a loss" | The stock does not know or care what you paid. It is going down regardless. |
Short Selling in Stage 4 (Advanced Traders)
For experienced traders, Stage 4 offers opportunities on the short side. The logic is identical to Stage 2 buying but reversed:
- Short entry: When price breaks below Stage 3 support on high volume with a declining 30-week MA
- Continuation short: When price rallies to the declining 30-week MA and is rejected (the MA acts as resistance)
- Cover (exit short): When the 30-week MA flattens and price begins to stabilize (Stage 1 forming)
- Stop loss: Above the 30-week MA or above the Stage 3 resistance level
Short selling carries additional risks (unlimited loss potential, borrow costs, short squeezes), so it should only be attempted by those who fully understand these dynamics.
How Capitulation Ends Stage 4 and Leads Back to Stage 1
Every Stage 4 decline ends the same way: capitulation. This is the moment when the last bulls give up. Selling volume spikes to extreme levels as every remaining holder throws in the towel. The emotional pain of holding through the decline becomes unbearable, and they sell at the worst possible price.
This capitulation volume spike is the mirror image of the breakout volume in Stage 2. It marks the climax of selling and the beginning of Stage 1.
After capitulation:
- The price stops falling and begins to move sideways
- The 30-week MA gradually flattens (it was declining)
- Volume dries up (no more sellers left)
- A new Stage 1 base begins to form
- The cycle repeats
THE TRANSITION FROM STAGE 4 TO STAGE 1
Price ($)
│
│╲
│ ╲ ← Stage 4 decline
│ ╲
│ ╲ ╱╲
│ ╲╱ ╲
│ ╲
│ ╲ ╱╲
│ ╲╱ ╲
│ ╲ ← Capitulation spike
│ ╲ in volume (below)
│ ╲
│ ╱╲ ╲╱╲ ╱╲ ╱╲ ╱╲ ╱╲
│ ╱ ╲ ╲╱ ╲ ╱ ╲ ╱ ╲ ╱ ╲
│══════════════╱════╲══════╲╱════╲╱════╲╱════════ ← MA flattens
│ ╱ ╲ ╲ ╲ = Stage 1
│ ╱
├────────────────────────────────────────────────→ Time
│ │
│ Capitulation
│
Vol │ ░░░░░░░░████████████░░░░░░░░░░░░░░░░░░░░░░
│ ↑ ↑
│ Huge volume Volume dries up
│ = capitulation = Stage 1 disinterest
└────────────────────────────────────────────────→
Stage 4 Identification Checklist
| Criteria | What to Confirm | Check |
|---|---|---|
| ☐ | Price has broken below Stage 3 support on a weekly closing basis | ☐ |
| ☐ | Breakdown occurred on heavy volume | ☐ |
| ☐ | 30-week MA is declining | ☐ |
| ☐ | Price is below the falling 30-week MA | ☐ |
| ☐ | Rally attempts are failing at or below the 30-week MA | ☐ |
| ☐ | Lower highs and lower lows are visible on the weekly chart | ☐ |
| ☐ | Relative strength vs the market is negative and deteriorating | ☐ |
Volume Analysis in Stage Analysis
Volume is the second pillar of Weinstein's method after the 30-week MA. Price tells you what is happening; volume tells you who is behind it. Institutional moves require large volume. Without volume confirmation, price moves are suspect.
Volume Patterns Across the Four Stages
VOLUME SIGNATURE OF THE FOUR STAGES
Vol
│
│ ████
│ ████
│ ████ ████ ████
│ ██ ████ ██ ████ ████
│ ██ ████ ████ ████ ██ ██ ████ ████
│ ██ ████ ████ ██ ████ ██ ██ ████ ████
│ ██ ████ ████ ██ ████ ██ ██ ████ ████
│ ██ ████ ████ ██ ████ ██ ██ ████ ████
│ ░░██░░░████░░░████░░░██░░░████░░░░██░░░██░░░████░████░░
│ ↑ ↑ ↑ ↑ ↑
│ │ │ │ │ │
│ STAGE 1 │ STAGE 3 STAGE 4 │
│ Low vol │ Mixed vol Increasing CAPITULATION
│ drying up │ Down days selling (Stage 4
│ │ heavier volume ends)
│ STAGE 2
│ BREAKOUT
│ Huge volume
│ surge
└────────────────────────────────────────────────────────→
Stage 1: Volume Contraction (Disinterest)
During Stage 1, volume gradually declines to very low levels. This is the market's way of saying "nobody cares about this stock anymore." Both buyers and sellers have lost interest.
What to look for:
- Weekly volume bars are small and getting smaller
- Occasional volume spikes are quickly followed by more quiet weeks
- The stock may not even appear in most screeners because turnover is so low
What it means:
- Sellers from Stage 4 are finally exhausted — there is no more forced selling
- The stock is changing hands from weak to strong holders, but slowly
- Late in Stage 1, you may notice a few above-average volume weeks — this is often institutional accumulation picking up pace before the breakout
Stage 2: Volume Expansion at Breakout (Confirmation)
The breakout from Stage 1 into Stage 2 must be accompanied by significantly above-average volume. This is non-negotiable. A breakout without volume is not a real breakout — it is likely a false move that will reverse.
What qualifies as "high volume"?
- At minimum, 2x the average weekly volume over the previous 10-20 weeks
- Ideally, the breakout week should be one of the highest volume weeks in the entire Stage 1 base
- The more volume, the better — it indicates stronger institutional commitment
After the breakout:
- Volume should generally be higher on up weeks and lower on down weeks
- Pullbacks to the 30-week MA should occur on declining volume (healthy consolidation)
- Bounces off the MA should show increasing volume (demand returning)
Stage 3: Volume Divergence (Distribution)
Volume behavior in Stage 3 is the most subtle and the most important to recognize. The key signal is a reversal of the healthy Stage 2 volume pattern.
In Stage 2 (healthy):
- Heavy volume on up weeks
- Light volume on down weeks
In Stage 3 (distribution):
- Light volume on up weeks (buyers losing conviction)
- Heavy volume on down weeks (institutional selling)
This volume divergence is often the earliest detectable sign of distribution, appearing before the 30-week MA flattens and before price breaks down. Watching volume carefully can give you an early warning to tighten stops or begin exiting.
Stage 4: Volume Spike (Panic and Capitulation)
Volume in Stage 4 follows a distinctive pattern:
- Breakdown volume — Heavy volume on the initial breakdown from Stage 3 confirms institutional selling
- Rally volume — Weak, below-average volume on bear market rallies confirms they are just countertrend bounces, not genuine buying
- Continued decline volume — Moderate to heavy selling pressure persists
- Capitulation volume — A massive volume spike near the end of Stage 4, when the last holdouts finally panic and sell. This extreme volume often marks the low and the beginning of Stage 1.
Relative Strength — Weinstein's Secret Weapon
While the 30-week MA and volume get most of the attention, Weinstein considered relative strength to be one of the most important (and underused) tools in the analyst's arsenal. This is not the RSI oscillator — it is a comparison of a stock's performance against a benchmark (typically the overall market or its sector).
What Is Relative Strength?
Relative strength (RS) is simply the ratio of a stock's price to a benchmark price, plotted over time:
RS = Stock Price / Benchmark Price (e.g., S&P 500)
When this ratio is rising, the stock is outperforming the benchmark. When it is falling, the stock is underperforming.
RELATIVE STRENGTH LINE INTERPRETATION
RS Line
│
│ ╱╲ ╱
│ ╱ ╲ ╱
│ ╱ ╲ ╱ ← RS RISING: Stock is
│ ╱ ╲╱ OUTPERFORMING the market
│ ╱ = BULLISH
│ ╱
│═══╱═══════════════════════════════════════
│ ╱
│ ╱
│╱
│╲
│ ╲ ╱╲
│ ╲ ╱ ╲
│ ╲ ╱ ╲ ← RS FALLING: Stock is
│ ╲ ╱ ╲ UNDERPERFORMING the market
│ ╲ ╱ ╲ = BEARISH
│ ╲ ╲
│
├────────────────────────────────→ Time
How to Use Relative Strength in Stage Analysis
Weinstein's rule is simple: only buy stocks with positive (rising) relative strength.
A stock may be in a Stage 2 advance, but if it is underperforming the market (RS line falling), it is a weak stock and should be avoided. You want stocks that are not only going up, but going up faster than the market.
| RS Direction | Meaning | Action |
|---|---|---|
| RS rising in Stage 1 | Stock is outperforming even before breaking out — early sign of accumulation | Add to top of watchlist |
| RS rising in Stage 2 | Stock is a market leader — ideal candidate | BUY or HOLD |
| RS flat or falling in Stage 2 | Stock is advancing but lagging the market — weaker candidate | Avoid or reduce position |
| RS falling in Stage 3 | Stock is losing relative momentum — distribution may be starting | SELL |
| RS falling in Stage 4 | Stock is a market laggard — potentially strong short candidate | SHORT or AVOID |
How to Interpret the RS Line
The RS line can be analyzed just like a price chart:
- Trend: Is the RS line making higher highs and higher lows (bullish) or lower highs and lower lows (bearish)?
- Breakouts: Does the RS line break above a resistance level before price does? This is a powerful leading indicator.
- Divergences: Is price making new highs but the RS line is not? This is a bearish divergence suggesting the stock is losing relative momentum.
Pro tip: Some of the best Stage 2 breakout candidates are stocks whose RS line breaks out before the price chart breaks out. This means the stock is already outperforming the market even while still in its Stage 1 base — a sign of strong underlying demand.
RS LINE BREAKOUT LEADS PRICE BREAKOUT — BULLISH SIGNAL
Price RS Line
│ │
│ ╱╲ ╱╲ ╱╲ │ ╱
│ ═════╱══╲═╱══╲═╱══╲══ │ ╱
│ ╱ ╳ ╳ ╲ │ ╱
│─────╱─────────────────── │ ─────╱──────── RS breakout
│ ╱ Stage 1 base │ ╱ BEFORE price
│ ╱ │ ╱
│ ╱ │ ╱╲╱
│ │ ╱
│ Price has NOT broken out yet │╱ RS already broke out!
│ but RS line is telling us │
│ demand is building │
├──────────────────────→ ├──────────────────────→
Step-by-Step Trading Strategy
This section synthesizes everything above into a complete, repeatable trading process. Follow these steps in order, every time.
Step 1: Weekly Chart Analysis — Identify the Stage
Start every analysis session by looking at the weekly chart (not daily, not intraday). Your first job is to classify the stock into one of the four stages.
| Ask Yourself | If Yes... |
|---|---|
| Is price oscillating sideways around a flat 30-week MA after a decline? | Stage 1 — Watch, do not buy yet |
| Is price above a rising 30-week MA, making higher highs and higher lows? | Stage 2 — This is a potential buy |
| Is price oscillating sideways around a flattening 30-week MA after an advance? | Stage 3 — Sell longs, do not buy |
| Is price below a falling 30-week MA, making lower highs and lower lows? | Stage 4 — Stay out or consider shorts |
If the stage is not clear, skip the stock and move on. There are thousands of stocks. Only trade the ones with obvious stage classifications.
Step 2: Screen for Stage 1 Bases About to Break Out
Build a watchlist of stocks in late Stage 1 — those that have formed well-defined bases and appear close to breaking out. The best candidates have:
- A clear, long-duration base (longer base = more powerful breakout)
- The 30-week MA has completely flattened
- Volume has contracted to very low levels
- Well-defined resistance (ceiling) that price has tested multiple times
- The RS line is improving or already in an uptrend
Use stock screeners to find:
- Stocks trading within 5% of their 52-week high after a long flat period
- Stocks with a flat 150-day MA and price near resistance
- Stocks where the RS line is already breaking out
Step 3: Confirm Breakout Criteria
When a stock on your watchlist moves to the resistance level, check all three breakout conditions before buying:
☐ PRICE: Weekly closing price is ABOVE the Stage 1 resistance level
☐ VOLUME: Breakout week volume is at LEAST 2x the recent average
☐ 30W MA: The 30-week MA is flat-to-rising (NOT still declining)
All three must be satisfied. If one is missing, wait for confirmation. Buying a breakout with low volume is one of the most common mistakes in stage analysis.
Step 4: Entry — Breakout or First Pullback
Option A — Buy at Breakout:
- Enter on the breakout week or immediately after
- Accept that you may pay a slightly higher price for confirmation
- This ensures you are buying genuine momentum
Option B — Buy at First Pullback:
- If you miss the breakout, wait for the first pullback to the rising 30-week MA
- The pullback should occur on decreasing volume
- Enter when price bounces off the MA on increasing volume
- This provides a lower-risk entry with a tighter stop
Step 5: Stop Loss Placement
Every position must have a predefined stop loss. There is no exception.
| Stop Loss Method | Level | Best For |
|---|---|---|
| Below Stage 1 base | Place stop 2-3% below the support (floor) of the Stage 1 base | Breakout entries — gives maximum room |
| Below 30-week MA | Place stop 2-3% below the current 30-week MA level | Pullback entries — tighter risk |
| Below the breakout candle | Place stop below the low of the breakout week | Aggressive — tightest risk, most prone to whipsaws |
Critical rule: If the stop is hit, exit immediately. Do not rationalize, do not wait for a "bounce back," do not move the stop further out. Exit and reassess.
Step 6: Ride the Trend — Trailing Stop Using 30-Week MA
Once in a profitable Stage 2 position, shift to trend-following mode:
- Each week, check the 30-week MA's slope and price's position relative to it
- As long as price remains above the rising 30-week MA, hold the position
- Adjust your trailing stop to stay 2-3% below the current 30-week MA each week
- Ignore daily noise — do not let intraday volatility shake you out of a weekly trend
- Be patient — great Stage 2 trends can last 6 months to 2+ years
TRAILING STOP MANAGEMENT IN STAGE 2
Price ($)
│
│ ╱╲
│ ╱╲ ╱ ╲
│ ╱╲ ╱ ╲ ╱
│ ╱╲ ╱ ╲╱ ╲╱
│ ╱╲ ╱ ╲╱
│ ╱╲ ╱ ╲╱
│ ╱╲ ╱ ╲╱
│ ══╱══╲╱═════════════════════════════ ← 30-week MA (rising)
│ ╱ = dynamic support
│ ╱
│
│ · · · · · · · · · · · · · · · · · · · ← Trailing stop
│ (2-3% below the 30-week MA, moves UP with MA
│ raised each week as MA rises)
│
├────────────────────────────────────────→ Time
The trailing stop ONLY moves UP, never down.
As the 30-week MA rises, your stop rises with it,
locking in progressively more profit.
Step 7: Exit When Stage 3 Signs Appear
Begin to exit your position when multiple Stage 3 warning signs converge:
☐ 30-week MA is flattening (no longer clearly rising)
☐ Price fails to make a new high above the previous high
☐ Volume is heavier on down weeks than up weeks
☐ Price closes below the 30-week MA on above-average volume
☐ Relative strength line is turning down
You do not need all five signals to act. Two or three converging warning signs are sufficient to begin reducing or exiting the position.
Exit approach:
- Conservative: Sell the entire position when 2-3 warning signs appear
- Moderate: Sell half when warning signs appear, sell the rest if price closes below the MA for 2 consecutive weeks
- Aggressive: Hold until the trailing stop (below 30-week MA) is hit
Risk Management Rules
Weinstein's framework includes strict risk management principles. No strategy works if you blow up your account on a single bad trade.
| Rule | Guideline |
|---|---|
| Position sizing | Never risk more than 2% of total capital on any single trade |
| Calculating risk | Risk = Entry Price - Stop Loss. Shares = (2% of Capital) / Risk per share |
| Diversification | Hold 5-10 positions maximum. Too many = over-diversification (mediocre returns). Too few = concentration risk. |
| Correlation | Avoid having all positions in the same sector. Diversify across industries. |
| Market exposure | In a broad market Stage 4, reduce total exposure to 25-50% of normal. Cash is a position. |
| Never average down | Do NOT add to losing positions. Only add to winners (pyramiding into Stage 2 strength). |
| Cut losses quickly | The stop loss is a hard rule, not a suggestion. Small losses are the cost of doing business. |
Position Sizing Example:
Account size: $100,000
Max risk per trade: 2% = $2,000
Stock price: $50.00
Stop loss: $46.00 (below 30-week MA)
Risk per share: $50.00 - $46.00 = $4.00
Position size: $2,000 / $4.00 = 500 shares
Dollar allocation: 500 x $50.00 = $25,000 (25% of account)
Stage Analysis Master Checklist
Use this comprehensive checklist to evaluate any stock systematically before making a trading decision.
Pre-Trade Checklist
STAGE IDENTIFICATION
☐ Identified the current stage (1, 2, 3, or 4) on the WEEKLY chart
☐ Confirmed the 30-week MA direction (flat, rising, or falling)
☐ Noted price position relative to the 30-week MA
☐ Assessed volume pattern (contracting, expanding, or diverging)
☐ Checked relative strength vs the broad market
STAGE 2 BREAKOUT ENTRY CRITERIA
☐ Price has broken above Stage 1 resistance on a weekly close
☐ Breakout volume is at least 2x average weekly volume
☐ 30-week MA is flat-to-rising (not still declining)
☐ Relative strength line is rising (stock outperforming market)
☐ No major resistance level immediately overhead
☐ Broad market is not in Stage 4 (rising tide helps)
RISK MANAGEMENT
☐ Stop loss is defined BEFORE entering the trade
☐ Risk per trade is 2% or less of total capital
☐ Position size is calculated based on stop distance
☐ Total portfolio exposure is appropriate for market conditions
☐ No more than 2-3 positions in the same sector
TRADE MANAGEMENT
☐ Trailing stop set at 2-3% below the rising 30-week MA
☐ Trailing stop is updated weekly
☐ Weekly review scheduled to check stage status
☐ Exit criteria defined (Stage 3 signs or stop hit)
POST-TRADE REVIEW
☐ Documented entry reason, stop, and target
☐ Will review the trade after exit (win or lose) for learning
Stage Comparison Summary Table
| Factor | Stage 1 | Stage 2 | Stage 3 | Stage 4 |
|---|---|---|---|---|
| Price trend | Sideways | Up | Sideways | Down |
| 30-week MA | Flat | Rising | Flattening | Falling |
| Price vs MA | Oscillates around | Above | Oscillates around | Below |
| Volume | Low/contracting | Expanding | Divergent | Expanding/panic |
| Duration | Weeks to years | Months to years | Weeks to months | Months to years |
| Relative strength | Neutral/improving | Strong/positive | Deteriorating | Weak/negative |
| Sentiment | Apathy/disinterest | Growing optimism | Peak euphoria | Fear/despair |
| Smart money | Accumulating | Holding/adding | Distributing | Short or flat |
| Retail money | Ignoring | Starting to buy | Buying heavily | Holding/capitulating |
| Your action | WATCH | BUY | SELL | AVOID/SHORT |
| Risk/reward | N/A (not trading) | Favorable | Unfavorable | Favorable (short) |
Applying Stage Analysis to Different Markets
While Weinstein developed stage analysis for individual stocks, the methodology applies to virtually any freely traded market. The underlying principle — that markets move in cycles driven by the interaction between informed and uninformed participants — is universal.
Stocks (Weinstein's Original Application)
This is the primary arena for stage analysis. Key considerations:
- Use weekly charts for all stage identification
- Apply the 30-week SMA (or 150-day SMA on daily charts)
- Works best on liquid, widely traded stocks — avoid thinly traded penny stocks where a single large order can distort the pattern
- Combine with sector analysis — if the entire sector is in Stage 2, individual stocks in Stage 2 within that sector have even higher probability of success
- Weinstein also applied stage analysis to the market indexes (S&P 500, NYSE Composite) to determine the "tide" — buying Stage 2 stocks in a Stage 2 market is ideal
Cryptocurrency
Stage analysis is highly effective in crypto markets due to the strong cyclical nature of digital assets:
- Bitcoin moves through very clear multi-year stage cycles tied to halving events (Stage 1 accumulation after a bear market, Stage 2 bull run, Stage 3 top, Stage 4 bear market)
- Altcoins tend to follow Bitcoin's stage cycle but with more extreme moves and shorter timeframes
- Use the 30-week MA just as you would with stocks — it works because the same human psychology drives crypto markets
- Crypto volume can be less reliable due to wash trading on some exchanges — prioritize price and MA analysis over volume in less liquid markets
- Higher volatility means wider stops are needed — adjust position size accordingly
Forex (Currency Markets)
Currencies present a unique challenge because they trade in pairs, and one currency's Stage 2 is the other currency's Stage 4. Key adaptations:
- Stage analysis works well on major currency pairs (EUR/USD, GBP/USD, USD/JPY) which exhibit clear trending and basing behavior
- The 30-week MA is effective because central bank policy cycles (tightening, easing) create multi-month trends
- Volume data is less accessible in spot forex — rely more heavily on the MA slope and price position
- Interest rate differentials often drive the fundamental backdrop that creates the stage structure
Indices (ETFs and Market Indexes)
Applying stage analysis to broad market indexes (S&P 500, Nasdaq, Russell 2000) or sector ETFs is one of the most valuable applications:
- Market stage determines the "tide." When the S&P 500 is in Stage 2, roughly 70-80% of stocks will also be rising. When it is in Stage 4, most stocks will be declining regardless of their individual merits.
- Trade with the tide. Only be aggressively long when the major indexes are in Stage 2. Reduce exposure when they enter Stage 3. Go to cash or short when they enter Stage 4.
- Sector rotation. Different sectors enter and exit stages at different times. In a market Stage 2, identify which sectors are leading (earliest into Stage 2) and focus your buying there.
| Market | Chart Type | MA Setting | Volume Reliability | Notes |
|---|---|---|---|---|
| US Stocks | Weekly | 30-week SMA | High | Weinstein's original application |
| Crypto | Weekly | 30-week SMA | Moderate | Wider stops needed due to volatility |
| Forex | Weekly | 30-week SMA | Low (spot) | Rely more on price/MA, less on volume |
| Indices/ETFs | Weekly | 30-week SMA | High | Use to determine the market "tide" |
| Commodities | Weekly | 30-week SMA | High (futures) | Strong cyclical patterns |
Common Mistakes
Even traders who understand stage analysis conceptually make these errors in practice. Study them carefully — awareness of these pitfalls is half the battle.
Mistake 1: Using Daily Charts Instead of Weekly
Weinstein designed stage analysis for weekly charts. Daily charts introduce too much noise and lead to premature entries and exits. The 30-week MA on a weekly chart smooths out short-term volatility and reveals the true intermediate trend. If you switch to daily charts, you will see dozens of "signals" that are not real — every minor pullback looks like a stage change.
Fix: Force yourself to only make stage analysis decisions on the weekly timeframe. You can use daily charts for fine-tuning entries, but the stage classification must come from the weekly chart.
Mistake 2: Buying Without Volume Confirmation
A breakout above Stage 1 resistance on average or below-average volume is not a real breakout. It is likely a false move that will reverse. Many traders see price poke above resistance and rush in, only to watch it fall right back into the base.
Fix: Be patient. Require at least 2x average volume on the breakout week. If volume is not there, wait. If the breakout is real, you will get another entry on the first pullback.
Mistake 3: Buying in Stage 3 ("It's Just Consolidating")
When a former Stage 2 stock begins to move sideways, it is natural to interpret this as "healthy consolidation" before another leg higher. Sometimes it is. But often, it is Stage 3 distribution. The difference is subtle but critical:
| Healthy Consolidation (within Stage 2) | Stage 3 Distribution |
|---|---|
| 30-week MA still clearly rising | 30-week MA flattening |
| Consolidation lasts 2-6 weeks | Consolidation lasts many weeks to months |
| Volume dries up during consolidation | Volume increases on down days |
| Price stays above the 30-week MA | Price crosses below the MA repeatedly |
| Relative strength holds or improves | Relative strength deteriorates |
Fix: If in doubt, it is Stage 3. Sell and move on. You can always buy back if you are wrong. You cannot unwind a 40% loss.
Mistake 4: Holding Through Stage 4 ("It'll Come Back")
This is the single most expensive mistake in investing. Holding a stock through Stage 4 because "it's a great company" or "it's oversold" or "it'll recover" has destroyed more wealth than any other behavioral error.
Fix: When the stop loss is hit or Stage 3 transitions to Stage 4 (price breaks below support on heavy volume, MA declining), sell. No exceptions. No negotiations with yourself. The rule is absolute.
Mistake 5: Ignoring the Market's Stage
Individual stock analysis is important, but it does not exist in a vacuum. If the S&P 500 is in Stage 4, buying individual stocks — even those "breaking out" — is extremely dangerous. Bear markets pull down the vast majority of stocks regardless of their individual merits.
Fix: Always check the stage of the major market indexes (S&P 500, Nasdaq) before entering any individual long positions. In a market Stage 4, reduce exposure dramatically. Cash is a position.
Mistake 6: Not Respecting the Stop Loss
Some traders set stops but then remove them when price approaches, hoping for a reversal. Others never set stops at all, relying on their "judgment" to know when to exit. Both approaches lead to catastrophe.
Fix: The stop loss is set at the time of entry and is non-negotiable. If it gets hit, you exit. Period. You can re-enter later if conditions improve, but you cannot un-lose money from holding a losing position.
Mistake 7: Overcomplicating the Analysis
Stage analysis works because it is simple. Some traders add dozens of indicators — MACD, RSI, Bollinger Bands, Fibonacci levels — and end up with analysis paralysis. Each additional indicator creates potential conflicts and uncertainty.
Fix: Trust the method. Price, 30-week MA, volume. That is all you need. Add relative strength for bonus points. Everything else is noise.
Mistake 8: Impatience with Stage 1
Stage 1 can last for years. Traders who understand the power of Stage 2 breakouts often try to anticipate them, buying early in Stage 1 and tying up capital in dead-money positions for months.
Fix: Wait for the breakout. Your job during Stage 1 is to build a watchlist, not a portfolio. Capital sitting in a Stage 1 stock is capital not available for confirmed Stage 2 opportunities.
Practice Exercises
Apply what you have learned with these exercises. For each, determine the stage and your recommended action.
Exercise 1: Identify the Stage
A stock has been declining for 8 months. Over the past 12 weeks, the price has stopped falling and is trading between $42 and $48. The 30-week MA, which was falling, has flattened at $45. Volume has been steadily declining and is now at its lowest level in months. No one in the financial media is talking about this stock.
Questions:
- What stage is this stock in?
- What should you do?
- What would trigger your next action?
Click to see the answer
-
Stage 1 (Basing / Accumulation). The stock has stopped declining, price is trading sideways in a defined range, the 30-week MA has flattened, and volume is contracting — all classic Stage 1 characteristics.
-
Add it to your watchlist. Do NOT buy yet. The stock is going nowhere, and you cannot know when (or if) it will break out.
-
A breakout above $48 (resistance) on at least 2x average volume with the 30-week MA beginning to turn up would trigger a Stage 2 entry. This is your buy signal.
Exercise 2: Evaluate the Breakout
A stock has been basing between $60 and $70 for 6 months. This week, it closed at $72 — above the $70 resistance level. However, the weekly volume was only slightly above average (about 1.3x normal). The 30-week MA is flat at $65.
Questions:
- Is this a valid Stage 2 breakout?
- What is missing?
- What should you do?
Click to see the answer
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No, this is NOT a valid breakout. While price has closed above resistance and the MA is flat (acceptable), the volume condition is not met.
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Volume is insufficient. At 1.3x average, this does not meet the minimum 2x threshold that Weinstein requires. Without strong volume, this could easily be a false breakout.
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Wait. Do not buy yet. Watch to see if the stock can hold above $70 and produce a high-volume confirmation week. Alternatively, wait for a pullback to $70 (now support) and see if a bounce occurs on high volume. If the stock falls back below $70, the breakout failed — remove it from the immediate watchlist and monitor for another attempt.
Exercise 3: Manage the Position
You bought a stock at $55 when it broke out of a Stage 1 base on high volume. It is now at $82 after a 6-month Stage 2 advance. The 30-week MA is at $74 and still rising. However, you notice that the last two new highs were made on declining volume, and the stock's relative strength line has flattened.
Questions:
- What stage is this stock in?
- Are there warning signs?
- What should you do?
Click to see the answer
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Still Stage 2, but in the late/mature phase. The 30-week MA is still rising and price is above it, so the uptrend is technically intact.
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Yes — two warning signs are present. (a) New highs are being made on declining volume, suggesting buyers are losing conviction. (b) The relative strength line has flattened, meaning the stock is no longer outperforming the market. These are early Stage 3 signals.
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Tighten your trailing stop. Move it to just 1-2% below the 30-week MA (currently around $72-73). Continue holding as long as price remains above the MA, but be prepared to sell quickly if the MA begins to flatten or if price closes below it. You might also consider selling a portion (e.g., half) to lock in profits while letting the rest ride with the tight stop.
Exercise 4: Avoid the Trap
A well-known technology company has risen from $30 to $150 over the past two years. Analysts have a consensus price target of $200. Earnings have beaten estimates for 8 consecutive quarters. The CEO was just featured on the cover of a major financial magazine. The stock has been trading between $135 and $155 for the past 3 months. The 30-week MA has flattened at $142. Volume has been notably heavy on the three down weeks within this range. The relative strength line has been declining for 6 weeks.
Questions:
- What stage is this stock in?
- What does the analyst consensus and media coverage tell you?
- What should you do?
Click to see the answer
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Stage 3 (Distribution). Despite the wonderful narrative, the technical evidence is clear: price is moving sideways, the 30-week MA has flattened after a long rise, volume is heavy on down weeks (institutional distribution), and relative strength is deteriorating.
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Peak bullish sentiment is a classic Stage 3 indicator. Analyst upgrades, magazine covers, record earnings, and consensus price targets at new highs are all signs that the story is fully priced in. Institutions are using this euphoria as cover to sell their positions to latecomers who are seduced by the narrative.
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Sell your long position. Do not wait for a breakdown to confirm Stage 4. The evidence is sufficient. If you are wrong and the stock breaks out to new highs on volume, you can always buy back. But if Stage 4 begins, the decline from $150 could easily take the stock to $75-$100 or lower. Protect your capital.
Exercise 5: Full Analysis
You find a stock trading at $28. Here is the data:
- 52-week range: $18 - $40
- Current 30-week MA: $26 (was declining, has now flattened over the past 8 weeks)
- Price has been oscillating between $24 and $30 for the past 14 weeks
- Volume has been declining steadily over the past 14 weeks
- The relative strength line has been quietly trending upward for the past 6 weeks
- The broad market (S&P 500) is in a clear Stage 2 (above rising 30-week MA)
Questions:
- What stage is this stock in?
- What elements are encouraging?
- What is your trading plan?
Click to see the answer
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Stage 1 (Late Basing). The stock was declining (Stage 4), the MA has flattened, price is trading sideways in a range, and volume is contracting — textbook Stage 1.
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Several encouraging elements: (a) The relative strength line is already rising — the stock is starting to outperform even before breaking out. This is a powerful leading indicator. (b) The broad market is in Stage 2, providing a favorable "tide." (c) The base has lasted 14 weeks, which is a reasonable duration. (d) Volume has contracted significantly, suggesting sellers are exhausted.
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Trading plan:
- Watchlist alert at $30 (resistance level)
- Buy signal: Weekly close above $30 on at least 2x average volume, with the 30-week MA beginning to turn up
- Entry price: Approximately $30-$31 on breakout, or $26-$27 on a pullback to the rising MA
- Stop loss: $23.50 (below the Stage 1 support at $24, giving 2% buffer)
- Risk per share: Approximately $6.50-$7.50
- Position size: (2% of account) / risk per share
- Trailing stop: 2-3% below the rising 30-week MA, updated weekly
- Exit criteria: Stage 3 warning signs (MA flattening, volume divergence, RS deterioration) or trailing stop hit
Key Takeaways
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Every stock moves through four stages. Stage 1 (Basing), Stage 2 (Advancing), Stage 3 (Topping), Stage 4 (Declining). The sequence never changes.
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Only buy in Stage 2. This is the money-making stage. All other stages are either too early, too late, or too dangerous.
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The 30-week MA is your primary tool. Its slope tells you the stage. Its position relative to price tells you whether to be long, short, or flat.
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Volume confirms the move. Breakouts must occur on high volume. Distribution is revealed by volume divergences. Capitulation ends Stage 4 with a volume spike.
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Relative strength separates the leaders from the laggards. Only buy stocks that are outperforming the market.
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Sell in Stage 3, not Stage 4. By the time Stage 4 is obvious, you have already lost a significant portion of your gains. Act on the early warning signs.
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The market's stage determines the tide. Individual stock selection matters less than whether the broad market is in Stage 2 or Stage 4. Trade with the tide.
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Simplicity is strength. Price, one moving average, volume. Do not overcomplicate the analysis.
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Risk management is non-negotiable. Position sizing, stop losses, and diversification are what allow you to survive long enough to profit from the methodology.
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Patience is the hardest part. Waiting for Stage 1 to complete, waiting for the breakout with volume, waiting through Stage 2 pullbacks, waiting for Stage 3 to confirm — the method requires discipline that most traders lack.
Further Reading
- Stan Weinstein — Secrets for Profiting in Bull and Bear Markets (1988). The original and essential text. Every word in this guide is derived from or inspired by this book. Read it cover to cover.
- Mark Minervini — Trade Like a Stock Market Wizard (2013). Minervini builds on Weinstein's stage analysis with his own "trend template" — a more precise set of criteria for Stage 2 stocks.
- William O'Neil — How to Make Money in Stocks (2009). O'Neil's CAN SLIM method shares many principles with stage analysis, particularly the emphasis on breakouts from bases on volume.
- Jesse Livermore — Reminiscences of a Stock Operator (1923). The original trend follower. Livermore's insights on patience, sitting tight, and following the line of least resistance are the philosophical foundation of stage analysis.
Stage analysis is not a guarantee of profits. It is a framework for making better decisions by aligning your trades with the dominant trend and managing risk systematically. The market will always produce exceptions, false signals, and surprises. Your edge comes not from being right every time, but from maximizing gains when you are right and minimizing losses when you are wrong.