Technical Analysis Lessons from Stan Weinstein.
In this article, the main focus will be on the best-selling book in technical analysis from Stan Weinstein “Secrets for Profiting in Bull and Bear Markets”, as well as his general teachings.
Bio
Not many things are known about his life. He likes to keep his private life, private.
Stain Weinstein holds a degree in economics, although he claims that he “put his degree on the side” during his career.
First published in 1988, the “Secrets for Profiting in Bull and Bear Markets”, has become a market classic in the field of technical analysis.
He is married and has three daughters.
Stage Analysis
Weinstein is famous for his “Stage Analysis”. Stan identified that historically, every asset follows the same price action cycle, and dived into four stages.
Stage 1 — The price has been dropping for a while and finally builds up a base by following a sideways movement (consolidation) and by following the 200-day moving average. At this stage, negative news doesn’t affect the price as much. This stage is known as accumulation because this is the stage in which “smart money” is looking to build up positions. The overall sentiment is still bearish.
Stage 2 — After moving sideways for a while, the volume starts growing exponentially, and the price breaks above the 200-day moving average and starts an upward movement. This is the ideal time for a trader/investor to open a position. This stage is known as “advancing”. The sentiment turns bullish.
Stage 3 — At stage 3, the price creates another sideways movement accompanied by good news, which, again, does not really influence any price changes. The 200-day moving average follows the price into a sideways movement. This stage is known as “distribution”. the main difference from the first stage is that here the overall market sentiment is still bullish.
Stage 4 — Lastly, the price breaks the 200-day moving average downward and stays below it during stage 4, until it creates a base again, and starts from stage 1 again. Last but not least, this stage is known as “declining”. Short-sellers are mostly active here, where the market sentiment is bearish.
Most people don’t know, but I have a degree in economics… I used to do so many interviews. I remember some interviewer asked me, “Stan, what did you do to become successful in the market?”. He thought I was being facetious, but I said, put my economic degree on the side and learn to be totally technical.
— Stain Weinstein
Forest to the Trees Approach
The “Forest to the Trees” strategy is the first step that Stan takes before any other analysis. Through this process, he will choose or reject stocks that will be available to him to trade.
One needs to check the overall market trend. Creating bias.
What are the overall sector and industry trends? Selecting the sector and industry.
Review the major ETFs
Open a one-year daily chart of a stock.
Open a five-year weekly chart of a stock.
Build a list of fewer than a hundred stocks list.
Are there any chart patterns appearing in the individual stock chart?
Is there any overhead resistance above its current position?
Check the relative strength of the stock.
Is the stock in stage two?
Is there a breakout entry point? Usually above the 50 MA or the 200 MA.
Is it supported by volume?
Lessons
Stan has written that traders must not listen to the news but instead see how the market reacts to the news. Fundamentals are also lagging information because the market is a discount mechanism and is based on future and not current information.
When the market starts to move upward, Stan focuses on the industries and sectors that perform the best and picks their leading stocks.
One should let his or her winners run, and cut his or her losers.
Profit taking by trimming, or simply put, reducing one’s position, should be considered when the price is too far extended from the moving averages.
Instead of trying to “buy low and sell high”, one should “buy high and sell higher”.
When stocks fall a significant percentage, they don't become “cheaper” or “opportunities”.
Stan focuses on moves that can last from two to four months.
Stan also implements tactics that today we would call behavioral finance. He suggests the works of Arthur Merrill (Behavior of Prices on Wall Street, Analysis Press, 1984) and Yale Hirsch (Don’t Sell Stocks on Monday, Facts on File Publications, 1986). He implements tactics such as the presidential cycle or the notion that one should not sell on Mondays.
One should focus on his or her gains and returns and not how much tax he or she would have to pay. “Everybody should have such problems,” commented Stan.
Average up (pyramiding) than down, meaning that one should buy more when the stock moves in his or her favor. One should average when the market agrees with his or her chosen direction.
One should also keep cash in his or her account so that he or she can trade opportunities as they arrive.
Volume is a gauge of how powerful the buyers are… Never trust a breakout that isn’t accompanied by a significant increase in volume.
- Stan Weinstein
Short Selling
A trader should learn to take long positions as well as sell short because stocks fall faster than they rise. Going long on a stock should take place when a stock enters stage two, and shorting should take place when a stock enters stage four.
A list of the most shorted stocks (short interest) can be found, along with their average daily volume. By dividing the two, one can get a ratio.
Fundamentals
Do not hold a stock just because the PE seems low. The reverse is also true.
Technical Analysis
When a trend line is tested multiple times without a break, it becomes a notable support or resistance level.
No trade should be held without a stop-loss. Although that’s true, there is no “magic level” or “percentage level”. One should be flexible, listen to the market, and not set a standard 10%, 12, or 15% stop. The stop loss should be moved and follow the price as it rises. A trend line can help plan future positions. Human psychology also teaches us that stop-loss orders should be placed below round numbers, as these levels are more likely to be used for selling or buying by humans.
Avoid stocks that are near resistance or that are overextended from their moving averages.
There’s an old saying among technicians: The bigger the base, the bigger the move… always be on the lookout for a breakout from a very large base formation.
- Stan Weinstein
Entry Points
The stock needs to have broken the 30-week moving average, created a base, and broken the base upwards, followed by a volume rise. When the move is healthy, the volume should decline before rising again.
Nobody can predict the bottom, that’s why the best time to buy is at the beginning of a stage two breakout.
Indicators
A trader should be consistent. One should find a profitable method and stick with it. Changing indicators every thirty days won't help anyone.
30-week, or simply put, 200-day Simple Moving Average. In addition, a 50- and 150-day moving average will also be useful.
Of course, the volume also needs to be present on the chart.
A valid trend line connects at least three points.
Indicators For Confirming Market Direction
Stan, as well as William O’Neil and Mark Minervini, pay attention to the breadth version of the RSI indicator. Instead of calculating an asset’s average gain and its average loss against itself, the breadth version calculates the average gain and loss against the market overall.
Another indicator that Stan Weinstein uses is the “Advanced-Decline Line”. It’s considered a breadth indicator because it assesses the broad participation of stocks in a market trend, rather than the trend’s direction alone. This indicator is used to measure the number of individual stocks participating in a market rise or fall. The AD Line is calculated by taking the difference between the number of advancing and declining stocks.
A comparison between all major indices can confirm a trend.
There is absolutely no doubt in my mind that one of the real keys to winning is learning how to lose.
- Stan Weinstein
Exit Points
When the stock shows weakness, sell. Waiting never helped.
One should close the position when the price falls behind the 50-day MA.
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