Mastering Stage Analysis of Stocks: A Beginner’s Guide

Stage Analysis of Stocks

The Stage Analysis of Stocks is an old concept developed by Stan Weinstein. Stage Analysis of Stocks helps us to analyse the movement of stocks. Stan Weinstein developed this concept in his book- “Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets“. Traders and technical analysts also refer to the market cycle when referring to stage analysis, though these concepts are not the same. A stock in a stock market moves up and down because of the buying and selling of the stock at different stages. This entirely depends on the demand of traders. Price-volume trend analysis helps us to analyse these stages better. Stan Weinstein used this idea to conceptualise the stage analysis in his 1988 book.

Stage Analysis of Stocks
Stage Analysis of Stocks

We will give a detailed analysis of the stages with respect to the behaviour of the stocks. The stage analysis of stocks consists primarily of four main stages, Bottoms, Uptrends, Tops, and Downtrends. The article will show how to analyse every stage. This will help newcomers understand the concept well and apply the strategies in their trading methods.

Stan Weinstein developed this method to categorise the movement of stocks to deeply understand the reason behind these patterns of stock movement. Also, he showed us how we can look deep into stock price behaviour. And therefore, find opportunities to buy and sell a stock. In this method, the volume analysis also comes into play. Accumulation and distribution of stocks follow a specific pattern led by volume. Once a trader understands the reason behind the ups and downs of a stock’s movement, the trader knows when to find trading opportunities. Earlier traders could not justify the trading opportunities. After the traders became aware of this method, the short-sell type of trading became popular.

Understanding the Basics of Stage Analysis of Stocks

Stage Analysis provides a basic framework to analyse stock movement by categorizing the movement into four basic divisions. Each stock traverses this path as it goes down, takes a pause, and then comes up again before coming down. It seems a perpetual cycle which never stops. Even the indices follow similar paths in different time scales. Traders find trading opportunities by analysing these stages of stock movement.

A stock’s price goes up and down over a period. It looks like a perpetual cycle. The price of a stock goes up and down in its life cycle. A stock’s price goes up when the demand from traders goes up, it reaches a limit and then the price decreases. At some time, the traders start selling the stock. As a result, the price comes down. When we look closely at this price path, we will see that there is a definite formation of peaks and troughs. From far it looks like a range of mountains. In a mountain range, we see peaks and valleys. The formation looks similar. Stan Weinstein found this formation to be quite justifiable and divided it into four stages. The four stages helped traders to find trade entry and exit.

We have found the price path goes up and down resulting in four different stages. Have you wondered how the price goes up or down when there is trading going on continuously? There is a critical factor behind it. Volume or trade volume is responsible for that. When buyers buy stock at greater volume and higher prices, the stock’s price goes up. Hence, we find an uptrend in the stock. A similar but opposite phenomenon happens when the price comes down and a downtrend develops.

Stage Transitions

It is important to understand the transition of stages. A stock in its life cycle goes from one stage to another through stage transitions. After a stock reaches its bottom, traders slowly start buying it in small volumes assuming the price will not go down further. They buy in the hope of gaining maximum profit after the stock goes up. Thus, a small uptrend develops. Other traders notice the stock’s movement and start buying it. This results in an uptrend.

Continuous buying takes the stock’s price to new highs and then the stock reaches a temporary limit. Traders who buy the stock at the bottom, start selling it because they feel the maximum price has been reached. Such small selling pressures are a trigger of a downtrend. Other sellers also start selling, creating a selling pressure on the stock. After the downtrend develops, the stock reaches its bottom when there is a minimum amount of selling. Thus another cycle develops. This is how a stock goes up and down by going through different stages.

What is Stage Analysis of Stocks?

Stage Analysis is an old concept and explains the reason behind the very basics of a stock’s movement. Stan’s principles of stage analysis allowed traders to analyse the price curve and create trading opportunities.

Stage Analysis of Stocks
Stage Analysis by Weinstein

This timeless concept, developed by Stan Weinstein, tells us about when to make an entry in the bull and bear market. Stage Analysis explains the price dynamics as a never-ending continuous cycle present in the life cycle of a stock. The Stage Analysis shows the four stages in the price curve – Bottom, Uptrend, Top & Downtrend. After the downtrend again another price bottom is formed and then comes the uptrend resulting in the repetition of this cycle. This is a continuous cycle and it goes on and on unless the trading in stock ends. Stage Analysis when a bullish trend starts and when the bearish trend starts. These stages also show us how to trade the trends. It is a basic but fantastic concept for trading. A trader can trade the trends repeatedly as long as the stock is traded.

Volume in Stage Analysis

Stan used the volume analysis concept to rationalize the stages further and made it further easy for the traders. As the book’s name suggests, the explanation of stages elaborately explains when to enter the bull or bear phase and when to exit from the trades. A big help for the traders, the theory is timeless and will work as long as trading is done.

The theory is a part of the Technical Studies. Stan was a profound reader and researcher on the technical analysis part of the analysis of stocks. Today, we have many modern techniques to analyse stock market movement from different angles, but this concept of stage analysis of stocks will remain everlasting.

The modern-day analysis takes into account various data points to analyse stock movement. However, the basic analysis remains the same. Three types of analysis are in use. They are Fundamental Analysis, Technical Analysis and F&O data analysis. F&O data analysis comprises analysing the future and options data to study the immediate trend, Fundamental analysis to read into the company data to find the strength of the company for long-term outlook and Technical analysis to analyse price movement and project the immediate and longer-term price projection path.

The Stage Analysis is a part of the fundamentals of technical indicators. Stage analysis only takes into account the price curve. However, there is another leading indicator besides the price. It is the volume or trading volume. Volume validates the price action. Stan Weinstein, therefore, used the volume validation concept when he came up with the principles of stage analysis. He found that these stages can be better explained when the price action is validated with volume. This background reasoning made his theory a timeless concept.

Significance of Identifying Different Stages

Investors and traders alike prefer to identify the stage of a stock. There is a lot to study between the stages to identify the significance of stages and filter out the noise. Stan Weinstein has clearly explained the subtleties involved in identifying the stages. Volume growth or volume anomaly plays a significant role in the stage analysis. A trend is established if volume validates it and vice-versa. Once the trader identifies the trend, investment becomes easy and will fetch a ripe harvest. Therefore it is important to analyse with subtelity and invest at the right time.

Stage transitions are more important compared to stages. Once you identify clearly the present stage, you may find that it is already well known to others and other investors have already invested in the stock. Then it may be too late to make money from investment. Therefore timing of investment has to be right. A good investor is an artist. He finds the right time of investment most of the time. Big investors like the late Rakesh Jhunjhunwala were a great example. He mostly invested in stocks when they were out of contention for others. Later people tried to follow in his footsteps and invested where Rakeshji did. The same is true for other global leaders in the stock market like Charles Dow, Warren Buffet, George Soros, and Peter Lynch are some of them. Their success stories are similar in this respect.

Stage Transitions

We need to be watchful to understand the subtleties of the stock market. In every stage, a stock goes up and down because of continuous trading. These small movements create a transition and slowly a stock moves towards another stage. But before the complete transition stage takes place, a good investor understands the transition phase and invests at the right time when a stock is about to start moving rapidly into another stage. The transition phase takes the test of the tenacity and character of an investor. He who wins gets the full benefit. Hence the transition phase is more important than the stages for investors. In every stage of its life cycle, a stock has to go through these four stages. A trader creates positions accordingly and finds trading opportunities.

Stage Analysis and Stock Cycle

Compared to Stage Analysis, a Stock Cycle refers to the evolution of the price cycle from the start of an uptrend to the top of the price curve to a downtrend and low price. Richard Wyckoff considered a pioneer in technical analysis, developed this and named it a Stock Cycle. It consists of the following four cycles.

  • Accumulation – Investors accumulate the stock at this stage. At this stage the volatility is low. Big investors start to accumulate the stock at this stage. This cycle occurs when the price of the stock is at or near its low.
  • Markup – Markup is the second cycle. The stock breaks out from the accumulation zone and the momentum picks up. Most of the investors and momentum traders push the price up through heavy buying of the stock. Continuous higher prices take the price to newer highs. The cycle ends when the price tops.
  • Distribution – The distribution cycle occurs when big investors start booking profit. This forces the price of the stock to go down. We can find volume anomalies at this stage. Also, technical indicators like RSI show bearish divergence.
  • Markdown – The bearish divergence leads to the Markdown cycle. Opposite to Markup, continuous selling pressure pushes the price lower making new lows. High volatility and short selling indicate that this stage may lead to the end of this cycle. At the end of this cycle, another Accumulation cycle starts starting another new cycle.

These four cycles are very similar to the four stages of of a stock. Only the developers of this named them differently. Traders’ approach is similar in both.

Reliance Stock Cycle
The Cycle Analysis of Reliance Stock

The picture above shows the Reliance stock as of 24.02.2024. The stock is in the Markup cycle. The price is going higher making new highs.

The Four Stages

Stage Analysis - 4 Stages
Stage Analysis – The Four Stages

Stan Weinstein showed us how to make a profit in the Bull and Bear market with the help of stage analysis. In his detailed analysis of the four stages, he explained how to enter and exit from a stock in different stages. In the following explanation of the four stages, it is better to explain the significance of the stages with the help of parameters Stan himself used in the explanation of the four stages.

Stage One – The Bottom

The Bottom is easily identifiable after the stock rises from this stage. After the selling of the stock, there comes a period when we can see minimum selling for a comparatively longer period. There will be less trading volume and the 30 ma period also reaches the bottom. Stan used these indicators for stage confirmation.

The shape of the bottom differs. But generally speaking, in a healthy market where Bulls and Bears compete with one another, the bottom shape looks like a saucer that has a roundish bottom. But in a long bull market, if a stock suddenly falls, as was during the COVID-19, every stock makes a V-shaped recovery. The Bottom was for a very short period after which stocks made a strong recovery. Hence the idea of a saucer-shaped bottom doesn’t apply here.

Traders who can identify the period start accumulating the stock slowly. The Bottom is hard to identify. Nobody knows where the bottom is. Therefore people start slow accumulation of the stock in the fear that the stock may fall further catching them off-guard. This is a slow process. Traders start investing more and more once they can identify that a stock is moving from the bottom.

Stage One
The Bottom

We can see from the picture, the shape of The Bottom consists of small up and down moves over a period. The Bottom stage ends when the stock rises from the range. As we can see The Bottom is marked with a square. It is a price range that has support and resistance. Slowly the stock breaks the range after repeated testing of the price resistance. Once the price breaks the range with high volume support, traders start buying heavily adding more volume and validating the price upmove.

Transition

The transition of phases is one of the most important aspects of stage analysis. Whatever analysis you do, it is very hard to decide when a stock goes to the next phase. Traders try to collect stocks at the minimum price and take advantage of the full run into the next phase. As it is hard to find the bottom, it is double hard to understand when the stock moves to the next phase. However, we can say that from the bottom the stock moves forward supported by double the average volume over a period to go into the next stage.

A trader may see the price rise accompanied by strong volume growth. In the chart, the price will show strong green consecutive candles with almost no tail. The 30 EMA line may lead the price path after a while. After the transition is over we go into the next stage.

Stage Two – The Uptrend

Stage two is often referred to as the bull run. It is the stage in the stock market when the bulls are most active. A stock in this stage continuously makes higher highs pushing the price further accompanied by strong volume growth. The 30 MA/ EMA line will lead the way. The price may consist of mostly green, strong candles. The price growth shows that the bulls are heavily buying the stock. Even the traders who bought minimum numbers of the stocks buy more.

Stage Analysis of Stocks
Stage Two – The Uptrend (Bull Run)

During this period, we may see price gaps while going up. Price jumps from one price due to heavy buying and does not retrace back the path. We may see such consecutive price gaps. These price gaps are also known as Continuation Gaps. Experienced traders do the typical type of trading popularly known as Gap Trading.

Stage Three – The Top

Stage Three - The Top
Stage Three – The Top

In this stage, a stock stops moving further upwards, as if it is exhausted and doesn’t want to move further. It behaves like an exhausted cart puller which can’t move further with the cart and wants to offload the burden. it is a simile I have used to explain the behaviour of a stock when it reaches the third stage. In stage analysis of stocks, the third stage denotes the end of the bull run.

In this stage, the stock does not seem to go any further because high volume doesn’t accompany it. The price seems to go up but faces steep resistance somewhere. The resistance seems unbreakable. Small traders may get trapped at such high prices near the top. The small traders may buy near the top and seem to hold the stock thinking that the price will go further up.

Near the end of the third stage, the distribution stage starts slowly. The strong price resistance shows that small buying can not take the stock further up. The stock price falls from the resistance price because buyers are selling near the resistance. This marks the end of the third stage. The repeated distribution of the stock near the price resistance shows the end of this stage. From this price, the price starts falling down.

Stage Four – The Downtrend

A downtrend in a stock starts when Stage Three ends. Profit booking from traders creates the start of the Thage Four. The stage analysis of stocks shows that Stage Four ends at the Bottom (Stage One). Thus the process creates a cycle. This cycle continues till the life of the stock ends.

Stage Analysis of Stocks
Stage Four – Downtrend

We have seen the distribution of stocks start right at or near the bottom. Traders assume that they have made enough profit and start to book profit. These traders are those who invested at or near the Bottom. After them come the others invested later. When the Downtrend is clearly seen, other traders join the early sellers. Thus the downtrend gets strength the price of the stock starts falling rapidly. This creates a panic selling and others start dumping their stocks. In this phase, we may see a continuity gap in the price. Price falls rapidly causing a gap-down in price. We also mention it as the Continuation Gap. One notable point is we can see lots of short sellers are being active here.

These traders sell first and buy later and book the profit. These continuous selling activities and continuous profit booking bring the stock to another Bottom and start another cycle. The downtrend in a stock sometimes synchronizes with the downtrend in the market. A bear phase in a market starts from there. Bears are active in Stage Four. Stan Weinstein showed us how to book profit from the Bear market.

These four stages are inevitable stages in the life cycle of every stock. Hence it is a must for a trader or investor to understand and watch closely these stages.

Tools and Techniques of Stage Analysis

Primarily, the Stage Analysis principles were formulated using Volume and 30 MA as tools to explain the strategies. Volume and Price are two leading indicators for technical studies. MA or EMA was used to get the average price for a longer period, usually 30 periods. Later many indicators like RSI (relative strength indicator), OBV (on balance volume) and many others were used. We need the price and volume to help us analyze the stages. We can make the analysis finer by using different technical indicators as filters to clean out the trading noise. In addition, we focus more on the volume buildup process. We take into account the average volume by plotting MA on the volume chart and whether there is an anomaly with the price curve. These indicators are enough.

Case Studies: Applying Stage Analysis of Stocks

Stage Analysis - Volume Anomaly
Stage Analysis of Stocks

This is a daily chart of INFY (Infosys Ltd.) shown above. INFY is going up from mid-January but the volume is falling. This shows that the price is near the TOP (Stage Three) and may come down creating a temporary downtrend. But the market is in a Bull stage. Unless the market also turns down, the downtrend in INFY will not be sustained, because it is a leading NIFTY 50 stock. Thus we can apply our knowledge to realize the current state of the market. The market is in a key position. If NIFTY 50 index comes down, we will start booking profit in Infy or short sell depending upon the market position.

Stage Analysis: Common Pitfalls

While doing stage analysis of stocks, we must be clear about our purpose. Market study and trading are not the same. While doing analysis, we must not think about our current position in the market. Every stage is critical during the building process. You may not clearly understand the stage in the middle of the process. Wait till the stage is clearly on view and trade. We commonly tend to jump into decisions before we get confirmation.

  • Don’t jump to conclusions. Wait till the confirmation comes from other indicators.
  • We should not hurry and wait for the sectoral movement or market movement to gain maximum.
  • Transition stages are hard to understand. A trader must confirm whether the next stage is in.

Stage Analysis Benefits

Stage analysis of stocks is immensely beneficial even today when robots and auto traders are active. The analysis involves longer period analysis and in turn, pays back heavily to a trader.

Conclusion

Stage analysis is for all traders. It only takes patience to study, understand and then trade. As everyone knows, trading is an art, not a science. Study and invest and become a true market artist. Stage analysis of stocks can bring the world of money-making tricks to your grips.

In conclusion, cycle analysis or stage analysis of stocks is an important tool for the swing traders and medium term investors. Newbie traders can slowly master this technique with repeated study of the price and volume charts.

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Author: Partha Dhar

Partha is a market analyst, FNO analyst, mutual fund advisor, blogger and a full-time trader since 2005. He also teaches market analysis online

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