Ok, so I’m not the best artist in the
world but I think it will serve our
purpose here! What? You thought it would
be more complicated that? My philosophy
on the stock market is that if it is too
complicated then it is just not worth
doing. Now, we’ll look at the
characteristics of the four stock market
stages. I promise it will be painless!
Stage One
Stage 1 is the stage right after a
prolonged downtrend. This stock has been
going down but now it is starting to
trade sideways forming a base. The
sellers who once had the upper hand are
now beginning to lose their power
because of the buyers starting to get
more aggressive. The stock just drifts
sideways without a clear trend. Everyone
hates this stock!
Stage Two
Finally stocks break out into Stage 2
and begins the uptrend. Oh, the glory of
stage 2!! Sometimes I have dreams of
stocks in Stage 2! This is where the
majority of the money is made in the
stock market. But here is the funny
thing: No one believes the rally! That’s
right, everyone still hates the stock.
The fundamentals are bad, the outlook is
negative, etc. But professional traders
know better. They are accumulating
shares and getting ready to dump it off
to those getting in late. This sets up
stage 3.
Stage Three
Finally, after the glorious advance
of stage 2, the stock begins to trade
sideways again and starts to "churn".
Novice traders are just now getting in!
This stage is very similar to stage 1.
Buyers and sellers move into equilibrium
again and the stock just drifts along.
It is now ready to begin the next stage.
Stage Four
This is the dreaded downtrend for
those that are long this stock. But, you
know what the funny thing is? You
guessed it. Nobody believes the
downtrend! The fundamentals are probably
still very good and everyone still loves
this stock. They think the downtrend is
just a “correction”. Wrong! They hold
and hold and hold, hoping it will
reverse back up again. They probably
bought at the end of Stage 2 or during
Stage 3. Sorry, you lose. Checkmate!
Here is an example:
Stock market stages occur in all time
frames on every chart you look at. This
could be a five minute chart of
Microsoft or a weekly chart of the Dow.
Generally, you want to stay in cash
when a stock (or the market itself) is
chopping around in a stage one. In stage
two you will want to be aggressively
focusing on long positions. In stage
three you want to be in cash. In stage
four you want to be aggressively
focusing on short positions.
