Stan Weinstein's Stage Analysis

[isatrader]

Hochschild Mining (HOC.L) Stage 4

Another way to play the recent precious metals breakdown is through the PM stocks. Of which, Hochschild Mining (HOC.L) is currently making a fresh Stage 4 breakdown.

 

[isatrader]

Am liking today's short covering rally. All of my open positions have moved into profit for the first time together. And DUK and SE have made new all time highs. Hopefully, it will continue.

 

[isatrader]

US Industry Sectors

Here's the latest US Industry Sectors charts. Utilities (XLU) continues to outperform with Consumer Staples (XLP) close to breaking out into a Stage 2 continuation. So it's worth looking through the Consumer Staples sub sectors to see what's outperforming and filter down to the individual stocks from there.

 

[isatrader]

Pfizer (PFE) Stage 2 Breakout

Pfizer (PFE) made a Stage 2 breakout with a 52 week high yesterday (20th). The Industry sector (Health Care) and the sub sector (Pharmaceuticals) both look reasonable. Pfizer is outperforming both of them by roughly 8% and is also outperforming the S&P 500 by the same amount. So the relative performance requirement is in place.

What I need to see now is a pick up in volume if it breaks higher, but if I take it, I'll only take a half position as recommended by the buying guide section as this is an investor entry point. With the idea to buy the remaining half position after the first continuation pivotal point is formed.

The monthly shows there's old resistance from the 2005 and 2006 range up to $29, but that still gives it room to move and old resistance is over 2 years old and so is less relevant.

Daily ATR(200) is: 0.42 points average movement per day or 1.96% as a percentage.
Weekly ATR(52) is: 0.89 points average movement per week or 4.15% as a percentage.

The investor stop position below $18 is over 8x the daily ATR(200), so a closer stop below $19.70 might be more suitable using the daily chart. But for the least risk you would need to wait for the breakout to pullback and form a new pivot point.

Here's the charts

 

[isatrader]

S&P 500 Stocks Sectors

I've set up a blog so I can organise all the stuff in this thread and I've made a page that has the S&P 500 stocks listed with their industry sector and their sub-sector. It has a search facility so you just need to type the ticker or the stock name or the sector and it will find it. Here's the link: S&P 500 « Stage Analysis

 

[isatrader]

Consolidated Edison (ED) Stage 2 Continuation

Another utilities stock hitting all time highs is Consolidated Edison (ED), which has had a very nice Stage 2 continuation breakout after forming a continuation pivotal point at the all time high and moving to new highs.

The breakout point has been missed but a pullback to that level and reversal higher would be a good position to get in risk reward wise. So I'll be watching for a pullback to $60 to possibility get in this one.

Dividend is 3.9%

Attached are the charts

 

[isatrader]

XLU, XLP Sectors Stage 2 Breakouts

Two of the the major industry sectors made Stage 2 breakouts today, with both the Utilities sector (XLU) and the Consumer Staples sector (XLP) hitting new 52 week highs. So these are the industry groups that you should be focusing on if you are trading on the long side and following the method.

Here's the charts

 

[alandvw]

Re: Consolidated Edison (ED) Stage 2 Continuation

ED is a great example of the Weinstein stage analysis method and using Moving Averages and correction high/lows to set stops.

Using Stan’s approach of a weekly chart and the 30-day MA, you would have been stopped out in mid February 2011when ED violated the 30-day around $48.55 but then you would have bout it back shortly and still holding it now for an excellent gain (plus dividends).

Using a daily chart, the best support area is at the 150-day MA which only triggered a few sell/buy signals during this year with only three low risk entry points.

Question for the group:

How are you using a combination of weekly and daily charts and Moving Averages to make your buy/sell decisions when combined with Stan’s stage analysis?

 

[isatrader]

Re: Consolidated Edison (ED) Stage 2 Continuation

ED is a great example of the Weinstein stage analysis method and using Moving Averages and correction high/lows to set stops.

Using Stan’s approach of a weekly chart and the 30-day MA, you would have been stopped out in mid February 2011when ED violated the 30-day around $48.55 but then you would have bout it back shortly and still holding it now for an excellent gain (plus dividends).

Using a daily chart, the best support area is at the 150-day MA which only triggered a few sell/buy signals during this year with only three low risk entry points.

Hi @alandvw, thanks for joining in the discussion of Stan Weinstein's method. ED is a good example of a long Stage 2 on the weekly chart since August 2010 with only one whipsaw out of it in August 2011. Which you would have got back into straight if you'd been in it. However, if you were following Weinstein's method you wouldn't have been in it until August 2011 at all as with Weinstein's method you need to consider lots of variables before placing your order, such as the stocks relative performance versus the market, the stocks relative performance versus the sector, the sectors relative performance versus the market and also against the other sectors and the key volume increase of at least 2 times the 4 week average volume. Plus other things as well. But looking at the utilities sector and it's relative performance, it was very weak during the late 2010 and never hit Stage 2 until March 2011 and was immediately whipsawed. Basically you would have avoided it because there was better opportunities in stronger sectors at the time.

Things are different now though as Utilities is the strongest sector currently in Stage 2 and breaking out to new highs. But you need to remember to look all the elements of the puzzle as a single chart isn't enough in order to find the A+ candidates.

 

[isatrader]

Question for the group:

How are you using a combination of weekly and daily charts and Moving Averages to make your buy/sell decisions when combined with Stan’s stage analysis?

Stan himself explains it better than any of us can in his book. So I'd recommend rereading Chapters 3 & 4 in the book for the best insight into this.

 

[alandvw]

Here is where it gets confusing - from Stan's book:

chapter 6, page 196: "a trader should never stay in a position once the 30 day MA is broken"

in the glossary on page 13, chapter 1 on MA, he states: "30-week MA is best for investors, 10-week MA is best for traders"

I translate the above to be 150 days on a daily for 30 week MA weekly and 50 days on a daily for 10 week MA weekly

so what is the take away from the above for a trader using a daily chart: should the 30 day MA be used or the 50 day MA be used?

chart 6-29 (a daily chart) on page 197 shows a stop out set at about the 30-day MA (daily) - the stop is clearly set above the 50-day daily MA

 

[isatrader]

Here is where it gets confusing - from Stan's book:

chapter 6, page 196: "a trader should never stay in a position once the 30 day MA is broken"

in the glossary on page 13, chapter 1 on MA, he states: "30-week MA is best for investors, 10-week MA is best for traders"

I translate the above to be 150 days on a daily for 30 week MA weekly and 50 days on a daily for 10 week MA weekly

so what is the take away from the above for a trader using a daily chart: should the 30 day MA be used or the 50 day MA be used?

You said 30 day MA in your example above. But he says 30 week MA in the book? So I think you've misread it as the 30 week MA is roughly the 150 day MA.

The 30 week MA is correct if you are using the short term trader methodology as the 10 week MA is the main moving average for that part of the method. So for it to reach the 30 week MA the momentum would have had to have wained significantly. So he states you should exit immediately if you are short term trading and it breaks that.

I've personally been focusing on the longer term investor part of the method with which the 30 week weighted moving average will be frequently touched during the Stage 2 phase. As I want to ride the majority of the major moves, not just catch short momentum moves.

As to your question on a daily chart about whether the 30 day MA should be used or the 50 day MA. I think Stan uses the 50 day MA on a daily chart and the 200 day MA which is confusing at first glance. Although I believe this is the case because the stages are determined on the weekly chart and these two MAs are the two most common moving averages looked out by people who trade from the daily charts. So they have more significance on the shorter time frame.

The 30 week MA, or 30 day MA or even the 30 minute MA are necessary for identifying the stages when you are looking at a particular chart, whatever timeframe it is. But remember that the main stage definition comes from the weekly chart, so that should always be looked at first even if you are doing short term trades.

chart 6-29 (a daily chart) on page 197 shows a stop out set at about the 30-day MA (daily) - the stop is clearly set above the 50-day daily MA

The stop position is actually determined by the pivot point at point E on chart 6-29, not the moving average. Re-read the method for moving your stop position up as it explains this.

I've found there are confusing parts to the book and some contradictions in places, which is why I've been doing this blog as it's my way of breaking down the method into manageable parts and trying to understand it clearly. As hopefully through discussion with others that use the method I can develop my understanding further and help others to as well.

Hope that helps

 

[isatrader]

Portfolio Management

I'm currently reviewing my first few months of live trading with the method and although it has been excellent so far a number of questions are coming up that aren't covered in the book, but need some significant attention.

Mostly, is portfolio management. For example, on the stocks long side I'm currently in mostly utilities and some consumer staples stocks as they are the sectors that are in Stage 2 at the moment. However, the premise of the method is to be in the strongest stocks, in the strongest sectors in Stage 2 at the time. But sectors rotate all the time and the current leaders might not be the leaders in a few months. And even though the sector might not be a leader anymore, there's a good chance that it will still be in Stage 2 for a long while, so the stocks I hold won't have given a sell a signal. But there might be better opportunities breaking out into fresh Stage 2 situations and becoming the new leaders elsewhere. So my question is how to deal with this?

Should I hold onto my initial portfolio stocks until they complete their respective Stage 2 situations and give a sell signal and only then start rotating into the new leading sectors.

Or another option, should I only allocate a certain weighting in my portfolio per sector. Maybe 3 to 6 sectors, so I could get into all the leading sectors at the ideal entry point per the method. This may mean that I'm only partially invested at certain times as only one or two sectors might be in Stage 2.

Or I could only invest in two leading sectors and sell out of them early as new sectors take over the leading role etc.

There's lot's of other scenarios going through my head, so I won't go on too much as I'm sure you get the gist by now. But I think this is an important area to consider, to successfully trade the method, of which there is no guidance from the book unfortunately as I imagine the scope it covers could probably fill a book itself.

But I'd appreciate any constructive insights that anyone has on this subject.

 

[theblackmamba]

the way im intending to do it is to risk 0.5percent on each trade, and have a total portfolio risk of 20percent . this will enable me to keep existing positions until stopped out. the downside will be could have upto 40positions in a full bull/bear mkt...

 

[isatrader]

the way im intending to do it is to risk 0.5percent on each trade, and have a total portfolio risk of 20percent . this will enable me to keep existing positions until stopped out. the downside will be could have upto 40positions in a full bull/bear mkt...

I think personally I'd prefer a more compact portfolio of only around 10 positions as I think I'd struggle to manage much more effectively everyday.

On further reflection, I think I'm going to try and keep a reserve of cash so that if the leading sectors do shift and I'm already fully in other sectors that are still in Stage 2, then I can start dipping my toes in a few of the new leading sectors stocks and hopefully add more as I'm stopped out of other positions in my account.

 

[lplate]

isa
Why not drop the sector analysis? Have you backtested its contribution?
Note that Alan Saunders makes no mention of sectors in his article on page one of your thread. Stage Analysis - finding the 'breakout' shares Ask him if it is worth doing.
You were looking at currencies and commodities earlier; there is no sector involved with that (though obviously there is correlation analysis).

 

[isatrader]

isa
Why not drop the sector analysis? Have you backtested its contribution?
Note that Alan Saunders makes no mention of sectors in his article on page one of your thread. Stage Analysis - finding the 'breakout' shares Ask him if it is worth doing.

Nope, but I am forward testing it's contribution, and so far it has proved vital to my returns. Alan Saunders only wrote a very small article that focused on the stages and some technical patterns. The book however, goes into great depth on the need for sector analysis and this is also used extensively in Jesse Livermore's top down trading method of which Stan Weinstein's method is based on imo. Dorsey Wright also have done many studies on relative strength which focuses on the sector analysis and base their RS matrix method around it, which again isn't too far removed from Weinstein's method although they use point and figure charting which Weinstein did say he did for spotting important formations and identifying areas of support and resistance at the start of the book (page 21), but that it was harder to master.

I have personal experience of how Alan Saunders trades and he only partially follows the method as has obviously developed his own variation of it, and is also very much more short term focused. Which isn't a bad thing, but my aim is to follow the method as closely as possible, as it's been used successfully by Weinstein for almost 50 years, which says a lot.

You were looking at currencies and commodities earlier; there is no sector involved with that (though obviously there is correlation analysis).

With commodities I always look at the sector, as it is vital on those imo. Precious Metals for example are strongly correlated to Gold, so if you trade Silver, Palladium or Platinum, you need to compare against Gold and the other precious metals and do relative strength analysis on the group as a whole.

For other commodities the Continuous Commodity Index ($CCI) should be used as it is the traditional basket of commodities that isn't distorted by a heavy weighting in energy commodities like the $CRB is. And another important chart to compare against is Copper.

And for currencies, I like to reference the dollar index for comparison on dollar pairs, but others like my GBP/EUR trade don't have a sector to look at, so I'd focus on how the individual currencies are performing against other currencies for the relative performance analysis.

 

[isatrader]

Sectors

I've been talking offline the last few days with another trader about the industry and sector stages of the stocks and how strict I need to be with regards to them when buying a stock. As it's not really dealt with in the book, but logically to get the leading stocks at the ideal entry point you need to buy them when the sectors aren't so perfect, but have at least began to stabilise in Stage 1, but the stocks themselves are moving into Stage 2. I would guess that if the industry sectors and sister stocks don't follow suit within the first month or so and make Stage 2 breakouts themselves that you would probably want to dump it unless it was an exceptional case.

So barring this in mind I've gone back through my trades from the last 3 months and noted the stages of the stocks, the market, the industry sector and the sub sector. And as I expected the majority of the sectors were in Stages 1A to 1B when the stock I've picked has broken out into Stage 2A as I've been trying to identify leaders.

I intend to follow this closely from now on and have set up eight columns on my spreadsheet to note down weekly the entry and exit stages of all the stocks I own including the market stage, industry sector stage and the sub sector stage. This checklist should hopefully further help me to eliminate any wayward picks that break the rules. As there's a lot to consider before buying a stock, so it's easy to miss those signs of weakness if I'm not organised.

 

[isatrader]

What to buy

To answer the question @lplate made on the previous page about the significance of sectors I had another read of The Ideal Time to Buy chapter in the book and found the following quote:

WHAT TO BUY

My "Forest to the Trees" Approach

Just as important as when to do new buying is what to buy. This is actually a far more complicated decision to reach. Once you digest the ideas in this section, it too will become routine.

It is really a three-part equation that I call my "Forest to the Trees" approach. What I mean is that you should work from the larger question - how's the overall market - down to the smaller component - which stock looks best to buy. In between these two extremes is the middle part of the equation - which group is acting best technically. So the process unfolds in the following manner:

1. What's the trend of the market? If it's negative, you'll want to do very little if any buying, even if you see some stocks breaking out. Your probabilities of success are quite low when the market trend is going against you.
2. Which few groups look the best technically? The importance of this question can't be overemphasized since my studies have consistently shown that two equally bullish charts will perform far differently if one is from a bullish sector while the other breakout is in a bearish group. The favorable chart in the bullish group will often quickly advance 50 to 75 percent while the equally bullish chart in the bearish group may struggle to a 5 to 10 percent gain.
3. Once you determine that the market trend is bullish and Group A acts the very best technically, the final step in the process is to zero in on the one or two best individual chart patterns in that sector.

If you follow this three-step process, you will find yourself heavily invested in the best acting stocks when the market is powering ahead, and sitting on large cash reserves when the overall trend turns bearish.

Quote taken from page 75

 

[dawson865]

Re: Sectors

So barring this in mind I've gone back through my trades from the last 3 months and noted the stages of the stocks, the market, the industry sector and the sub sector. And as I expected the majority of the sectors were in Stages 1A to 1B when the stock I've picked has broken out into Stage 2A as I've been trying to identify leaders.

You can't be too ridged with theses things - the point is that 1 or 2 leading stocks will break out first, followed by 3, 4, 5, 6+ more, the pack comes along. By this time the first 1 or 2 will have done 100% or more & may be resting & basing again for the next leg up. Eventually 1 or 2 stragglers will come up the rear & by this time the sector move is all but over.

So the point is - look for strength in the sector - if you see some strong breakouts (& the market itself is agreeable) then you can take them as an aggressive trade. Otherwise you can wait for confirmation.

Remember the sectors are made up of the stocks that are in it - not the other way around.