Learning the principles of Stage Analysis
The Market as whole moves in cycles — we’ve covered Sector Rotation — but individual stocks also move in cycles. And we can use chart analysis to notice patterns and try and predict the behavior of a stock’s price. Let’s do a quick recap about basic price movement:
The price of a stock only moves in 3 directions:
- Sideways (consolidation)
- Upward (accumulation)
- Downward (distribution)
So in general, if you’re in a position, it is either going up (making gains), going down ( suffering losses), or just kinda meandering in the same area you bought (breaking even).
The 4 Stages of Price Movement
Price may only move in 3 directions, but when we refer to the stages of a position, we break them down into 4 categories (it’s still really just 3 but bear with me for a moment).
The principles of Stage Analysis was outlined by Stan Weinstein in his 1988 book, Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets.
The 4 Stages of Price Movement are:
- Stage 1: Bottoms — Also referred to as the Accumulation stage
- Stage 2: Uptrends — Also referred to as the Mark-Up stage
- Stage 3: Tops — Also referred to as the Distribution stage
- Stage 4: Downtrends — Also referred to as the Mark-Down stage
Weinstein’s concept is the basis for Gerald Peters’ Money Flow Trading System. Below you’ll see his diagram of the Four Stages of Price Movement.
You’ll notice this is the same general pattern outlined in other writings: