STAN WEINSTEIN
- Stocks form bottoms when the current news is terrible and top out when the public is ecstatic about glowing earnings reports, stock splits, and so on.
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- Never buy or sell a stock without checking the chart.
- Never buy a stock when good news comes out, especially if the chart shows a significant advance prior to the news release.
- Never buy a stock because it appears cheap after getting smashed. When it sells off further, you’ll find out that cheap can become far cheaper!
- Never buy a stock in a downtrend on the chart (I’ll soon show you specifically how to define a downtrend).
- Never hold a stock that is in a downtrend no matter how low the price/earnings ratio. Many weeks later and several points lower, you’ll find out why the stock was going down.
- Always be consistent. I f you find that you’re sometimes buying, sometimes selling in practically identical situations, then there is something terribly wrong with your discipline.
- Be aware, however, that you can’t become fanatical, as too many technicians often do, when talking about support as being at a certain point. It’s really an area or zone.
- The more times a given support level is tested, and the longer the time period during which the testing takes place, the more important the negative signal that is flashed if that zone is eventually violated.
- 30-week moving average (MA) is the best one for long-term investors, while the lO-week MA is best for traders to use.
- Stocks trading beneath their 30-week MAs should never be considered for purchase, especially if the MA is declining. Stocks trading above their 30-week MAs should never be considered for short selling, especially if the MA is rising. For a long-term investor, the ideal time to buy a stock is when it breaks out above resistance and also moves above its 30-week MA, which must no longer be declining. For a trader the ideal time to buy a stock is when it’s already above its 30-week MA, when the MA is rising. The trader’s ideal entry point is after a stock consolidates in a new trading range and pulls back close to the moving average, then breaks out again above resistance.
- Two hints to always remember are: (1) the longer the time spent below the resistance, the more significant is the eventual breakout; and (2) the greater the expansion of volume on the break- out, the more bullish the implications.
- Unlike a breakout, a breakdown doesn’t need very heavy volume to be valid. Stocks can literally fall of their own weight, but there should be some increase in volume.
Pullback. After a stock breaks out of its trading range and ad- vances, there is usually at least one profit-taking correction that brings the price of the stock back close to the initial breakout point (in this case 12Vs). This is an ideal second chance to do further buying (especially if the pullback occurs on sharply decreased vol- ume). On the other hand, after a stock breaks down below support and declines, there is usually at least one pullback back up toward the breakdown level (in this case 257/8). If this occurs on very light volume, it is an ideal entry point to sell the stock short. - A sig- nificant trendline will be touched at least three times.It’s also important to realize that the greater the slope of a given trendline, the less meaningful its break is on the downside. If you have a very steep advancing trendline (Chart 1-8), a break below that trendline may merely mean that a stock (or a market average) is now going to move up at a slower rate of advance-
- The most bullish signals are given when a very important trendline is broken on the upside, and within a matter of days the long-term MA is also overcome on the upside.
- it’s very important that volume is large and expanding on a breakout
- never buy a stock-no matter how cheap it appears based on fun- damentals or a recent sharp decline-if it is trading below its de- clining 30-'week MA. The price performance is giving you a clear signal that there’s a worm in the apple! Don’t even think of buying it! Conversely, never sell short any stock that is above its rising 30-week MA no matter how high the price/earnings ratio is.
- As long as this line is in a downtrend, don’t consider buying the stock even if it breaks out on the high-low- close price chart.
- watch for those situations where it moves from negative territory (below the zero line) to positive territory. That is another favorable signal.
- Even though they had fallen substantially before their relative-strength line turned negative, once their relative-strength graphs dropped into negative territory, there was far more decline ahead of them.
CHAPTER 2
ONE GLANCE IS WORTH A THOUSAND EARNINGS FORECASTS
- The ideal time to buy is when a stock is finally swinging out of its base into this more dynamic stage. Such a breakout above the top of the resistance zone and the 30-week MA should occur on im- pressive volume. This is the start of the advancing Stage 2 uptrend phase. However, before the really dynamic part of the advance gets rolling, be aware that there is usually an initial rally followed by at least one pullback. That dip brings the stock back close to the breakout point, which is a good second chance to do low-risk buying.
- Interestingly enough, at the breakout point-which is the perfect time to buy-the reported fundamentals will often be negative.
- this stock is now trading far above its support level and MA and is being discovered by the investment community; it is overextended and most definitely no longer a buy. This is the point where buying puts you at considerable risk.
From an investing point of view (we’ll deal with trading in a later chapter), the right time to buy the stock was either on the initial breakout or on the later pullback toward the breakout level - how many times I’ve seen portfolios filled with big losses because the entry point for the given stock was poor. Be disciplined! If you are a long-term investor, buy only at the proper entry point early in Stage 2 (in the case of XYZ, near 12Ys). If you miss buying a stock, don’t get panicky and chase it and just end up paying any old price. Be consistent. Either buy it right or don’t buy it at all. Obviously a little common sense is needed. If you miss it at 12Ys, buying at 12Vs is no big deal, but paying 25 or 26 sure is! If you’ve missed a good stock, don’t fret about it. With thousands of listed and over-the-counter stocks to pick from, there will always be good stocks at great prices. It’s similar to hailing a taxi; if you miss the first one, another one will soon come along.
- Volume is usually heavy in Stage 3 and the moves are sharp and choppy. If you’ve ever heard the expression that a stock is “churning” (moving sideways on heavy volume), this stage is an outstanding example of it.
- But it’s imperative that you protect your profits on the remaining half po- sition with a protective sell stop set right beneath the bottom of the new support level
- So remember-no matter how powerful the fundamentals, no matter how convincing the story, you are never going to buy a stock in this stage because the reward/risk ratio is strongly stacked against you.
- Unlike an upside breakout, which needs a significant increase in volume to be considered trustworthy, a downside break into Stage 4 doesn’t necessarily need such a huge increase in volume to be considered valid. A volume increase on a breakdown followed by a volume decrease on a pullback to the breakdown point does signal a very dangerous situation; yet I’ve seen many cases where a stock moved into Stage 4 on relatively light volume and dropped substantially in the months ahead.
- At this moment, stop and reflect for a second and then make a pledge to yourself. Take the oath that you are never going to buy another stock in Stage 4. Also promise yourself that you will never hold onto any of your stocks once they move into Stage 4.
CHAPTER 3
THE IDEAL TIME TO BUY
- There are two great times for an investor to do new buying and both center around the breakout point. The first is when a stock initially moves out of its Stage 1 base and enters Stage 2. The second and safer time is when a stock pulls back toward the break- out point after the initial Stage I buying frenzy burns out.
- If you’re a long-term investor, compromise and buy half of your intended position on the initial breakout, and the other half if the stock pulls back close to the breakout price and you like the post-breakout action. I
Chart 3-1 shows graphically what the process looks like. Point A is an excellent time to do new buying. It’s an especially good entry point for investors. At this juncture the risk is extremely low since the base of support is just underneath your purchase price. Equally important, the upside potential is tremendous since the entire Stage ~ advance lies ahead of it. The only drawback is that it can take time for solid Stage 2 momentum to build. - Volume favorably contracted on the pullback, so then is when you should have bought your remaining half of the position. Thereafter volume increased sharply as it gathered momentum
- very profitable time to do new buying. It occurs after a Stage 2 advance is well underway, when the stock drops back close to its MA and consolidates. It then breaks out anew above the top of its resistance zone (point A on Chart 3-3). This is called a continuation buy. Again there is a tradeoff involved. In this case the probabilities are overwhelmingly high that the advance will be rapid, but there is a greater risk factor.’ This type of buy is more suited to traders than investors. But investors, too, should be willing to do some late Stage 2 buying when the overall market is ver
- The moving average should be clearly trending higher. This is important! Just as a marathon runner needs something left in reserve for the finish, so does a Stage 2 advancing stock. If the MA starts to roll over and flatten out, you don’t want that stock. Even if it breaks out in a continuation move, it is not likely to have that tiger in its tank that we want. Instead, look for a stock that mimics the outline of this chart and has plenty of high octane power left.
- Although about 80 percent of initial breakouts from a Stage 1 base are followed by a handy pullback, this happens with less than 50 percent of contin- uation buys. This is especially true if the stock is going to be a grand-slam home run. So the proper tactic when dealing with this type of breakout is to buy your entire position when it overcomes its significant resistance.
While there are no official rules, I would say as a rule ofthumb investors over the years should do about 75 to 80 percent early Stage 2 buying with the remainder coming from continuation moves. Traders, on the other hand, should reverse the figures and do about 80 percent of their buying on breakouts that are already in Stage 2 and have consolidated near the MA before breaking out once again. The rest of a trader’s buying should be of the early Stage 2 variety. - I’ve always found that my most profitable judg- ments are made late at night or on weekends.
- What a buy-stop order does is tell the specialist that you want to buy stock XYZ. But-and this is an incredibly important but- only if the stock breaks out above a certain level.
- Using buy-stop orders is very important to your new market strategy.
- Using GTC-stop orders will get you in the habit of doing several positive things. First of all, you won’t have to watch the market closely during the day, which will allow you to concentrate your energies more clearly on your job. Second, you will make far better, less emotional decisions, since they will have nothing to do with that day’s crazy market action.
- sudden strength can cause you to scramble to buy something because it suddenly looks like the market is running away without you. Don’t operate in this manner. It’s crucial that you learn how to properly buy stocks in a disciplined, relaxed way. By using my method of stage analysis and combining it with GTC buy-stop orders, everything will be automatic, which is just what we want to accomplish. Over the years, it has become obvious to me that the more mechanical I’ve made my system and the less
subject to judgments and emotions, the more profitable it has be- come. - In order not to get caught up in the fear-greed syndrome, set time aside each weekend to unemotionally scan your chart publication. You really only need an hour for this chore, but obviously the more time you can spare, the better. Make up a list of the few outstanding potential buys that you see among the many charts. Then, each night, chart and follow these few stocks plus any other issues in your portfolio.
- A very common mistake made by amateur technicians (and, surprisingly, even by some professionals who should know better) is to buy when a stock breaks out above its base even though it is still below its declining 30-week MA.
- Also critical was the fact that the breakout (point A) from the trading range occurred below the MA. Even though WU later edged above its MA, the fact that the initial breakout took place below the MA was an additional warning sign. It was an even more serious red alert that the MA never stopped heading south. Never buy a stock in this position no matter how cheap it looks.
- you should not have considered buying it for even a moment because the breakout was below the MA
WHAT TO BUY
My “Forest to the Trees” Approach
The place to start this next level of learning is the charts themselves. To do this, we are going to scan the Standard & Poor’s weekly industry charts.
When dealing with groups, use the same criteria that you do with stocks. Investors should concentrate their buying in those market areas breaking out of Stage 1 base patterns, while traders should lean toward continuation moves in already existing Stage 2 uptrends. There is one difference, though. If the group is already in a well established Stage 2 uptrend and is far above support, an investor wouldn’t normally be in a big hurry to buy that pattern if it was a stock. But if the group is already well into Stage 2 and you find a stock from that sector first breaking out of its Stage 1 base, then it’s fine for an investor to buy that particular stock. In the same manner, if a trader saw a continuation-pattern buy that looked good in a group that had just moved into Stage 2, the trader can definitely buy that stock. The most important factor when dealing with groups is that the sector be healthy. (That is, not in Stages 3 or 4). All things being equal, however, the very best sit- uation for an investor is a stock that is an early Stage 2 breakout in a group with the exact same pattern. For a trader, the ideal is a continuation breakout within a dynamic group exhibiting the very same sort of pattern.
CHAPTER 4
- REFINING THE BUYING PROCESS
one of the most important is where overhead resistance is situated.
- The message is obvious: always check where and how much resistance is overhead on any stock before you pick up the phone
to dial your broker with a buy order. - Never trust a breakout that isn’t ac- companied by a significant increase in volume.
- volume should pick up sig- nificantly on the breakout. If it doesn’t, the probabilities are very high,
- Note that there was another bullish signal given on the pullback. Volume contracted by over 75 percent from peak levels.
- we want the market trend to be bullish. Second, the groups should be positive. In addition, the chart from that favorable group must be breaking out into Stage 2 with a minimum of resistance overhead. Finally, volume most definitely must confirm the breakout.
- When you see inferior action in the RS line compared to the price performance, don’t ever buy that stock. Conversely, when you see a very positive relative- strength trend, do not consider shorting it.
- Don’t think, however, that you can never buy a stock below the zero RS line, or that you can never short a stock above the zero line. If the relative strength is in good shape and improving and all other criteria are positive, then go for it. But absolutely never buy a stock, no matter how good the other factors, if the relative strength is in negative territory and it remains in poor shape.
- • Check the major trend of the overall market.
• Uncover the few groups that look best technically.
• Make a list of those stocks in the favorable groups that have
bullish patterns but are now in trading ranges. Write down
the price that each would need to break out.
• Narrow down the list. Discard those that have overhead re-
sistance nearby.
• Narrow the list further by checking relative strength.
• Put in your buy-stop orders for half of your position for those
few stocks that meet our buying criteria. Use buy-stop orders
on a good-'til-canceled (GTC) basis.
• If volume is favorable on the breakout and contracts on the
decline, buy your other half position on a pullback toward the initial breakout.
• If the volume pattern is negative (not high enough on break- out), sell the stock on the first rally. If it fails to rally and falls back below the breakout point, immediately dump it. - The first one is the head-and-shoulder bottom formation. This is the most powerful and reliable of all bottom formations.
- Up until now, rallies that started after a new low was registered failed far below prior peaks.)
- Ideally, the rally peaks (points A and B) will be at the same ap- proximate price, and the two selloffs-on each side of the reverse head-will be approximately equal. But don’t be a fanatic; both the peaks and the two selloffs can be off a bit. Just be sure that there is some semblance of symmetry.
- points A and B on the chart (the first two peaks) should be connected with a trendline that is called the neckline. Keep a close eye on the neckline, because i
- I’ve come to the conclusion that volume is not a good indicator of future upside potential for head-and-shoulder bottoms.
There are two signals that are important and very reliable. Both are from our system, and neither must ever be ignored. First, make sure that the 30-week MA is in fine shape. - The second important signal is volume after the stock breaks out above the neckline and the MA.
- Head-and-shoulder bottom patterns are definitely easier to spot on a daily chart than on a weekly graph. Look at Unocal first on the Daily Graphs Chart (4-21), then on the Mansfield weekly Chart (4-22) and you’ll see what I mean. Nevertheless, the really pow- erful patterns can be picked up even on the weekly chart.
- the two rally peaks (points A and B) are connected to form the neckline.
- BIGGER IS BElTER
There’s an old saying among technicians-“the bigger the base, the bigger the move” (the corollary being, “the bigger the top, the bigger the drop”). I heartily subscribe to that statement. While there are plenty of cases where short-term bases, when mixed with all the other winning ingredients, produce excellent results, always be on the lookout for a breakout from a very large base formation. This is especially important since these formations usually lead to very extensive and long-running advances. - • Don’t buy when the overall market trend is bearish.
• Don’t buy a stock in a negative group.
• Don’t buy a stock below its 30-week MA.
• Don’t buy a stock that has a declining 30-week MA (even if
the stock is above the MA).
• No matter how bullish a stock is, don’t buy it too late in an
advance, when it is far above the ideal entry point.
• Don’t buy a stock that has poor volume characteristics on the breakout. If you bought it because you had a buy-stop
order in, sell it quickly.
• Don’t buy a stock showing poor relative strength.
• Don’t buy a stock that has heavy nearby overhead resistance.
• Don’t guess a bottom. What looks like a bargain can turn
out to be a very expensive Stage 4 disaster. Instead, buy on breakouts above resistance.
there is the tendency to concentrate on the issues that are acting well and put aside your concern about the
Relining the Buying Process 137
138 Chapter 4
laggards, figuring they will come to life later. What happens is that you let the good stocks subsidize the bad ones.
The proper way to look at your stocks is to make believe that each position is the only one you have. If it’s acting fine, great, ride with it. But if it’s lagging badly and acting poorly, lighten up on that position even if the sell-stop isn’t hit. Move the proceeds into a new Stage 2 stock with greater promise.
CHAPTER 5
UNCOVERING EXCEPTIONAL WINNERS
if the chart is bullish but so far above its ideal entry point, as Anchor Glass Container (Chart 5-2) was in mid-1987 near 28, then forget it.’ I’d rather miss out on a potential profit any day than buy a stock with a poor reward/ risk ratio. All you’ve lost when you miss a winner is a potential profit. Like buses, another one will come along.
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So discipline and selectivity are operative words to always keep in mind. Remember, we can make really big money in the market even if we pass up 100 winners and buy only 10 stocks during the year, with 7 or 8 turning out to be winners.
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So never believe in any potential takeover that doesn’t show a very significant increase in volume.
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THE TRIPLE CONFIRMATION PATTERN Anthony Industries fufilled all of the necessary criteria perfectly. Volume expanded by about four times normal levels-a definite sign of important buying interest (A on Chart 5-16). Furthermore, volume remained heavy in the following weeks. The RS line also moved decisively into positive territory (B on Chart 5-16). The third significant clue that a big payday was shap- ing up was the volatile action that Anthony Industries displayed while it was still in its Stage 1 base. It swung back and forth between support at 5 and resistance at 10.
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The third important signal that a big advance was shaping up was the big move National Semiconductor staged before the Stage 2 breakout took place.
CHAPTER 6
WHEN TO SELL
The sell decision is crucial if you are going to really win big in the market. Unfortunately, few market players ever master this important step.
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Don’t base your selling decision on tax considerations.
Don’t ever fall into this trap, When a stock turns negative, it’s a sale whether you have a profit or a loss or have to pay taxes. The bloodless verdict of the marketplace doesn’t know what you paid for the stock and doesn’t care. You have to learn to be objective and dispassionate, -
Don’t base your selling decision on how much the stock is yielding.
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Don’t hold onto a stock because the pricelearnings (PIE) ratio is low.
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Don’t seLL a stock simply because the PIE is too high.
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Don’t average down in a negative situation.
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Don’t refuse to sell because the overall market trend is bullish.
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Don’t wait for the next rally to sell. When the chart pattern signals that a stock is running into trouble, get out immediately. Don’t wait around trying to recoup an extra point or two on a rally.
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Don’t hold onto a stock simply because it is o f high quality.
SELLING PROPERLY-THE INVESTOR’S WAY
When you set your initial stop, pay less attention to the MA and more to the prior correction low.
If the sell-stop should be placed right above a round number, or on it, set it instead just under the round number.
try to limit your purchases to those cases where the initial stop isn’t greater than 15 percent below your purchase price.
As long as the stock is above its rising 30-week MA, and the MA is rising in Stage 2 fashion, be sure to give it plenty of room to gyrate.
Therefore, once a stock moves into this higher risk zone you should become more aggres- sive with your sell-stop. In the case of XYZ, that means moving the stop under the correction low at point K even though it is above the MA.
As long as the MA is sloping upward at a sharp angle of ascent, investors should be sure to give a stock
As long as the MA is sloping upward at a sharp angle of ascent, investors should be sure to give a stock plenty of room when placing the stop.) Next you should have raised the sell-stop to N, then to P. But once the MA starts to level out and a potential Stage 3 top begins to unfold, it is time to pull the sell-stop up tighter. Now you should have pressed the stop up to point Q even though it was above the MA.
even if the stock slightly penetrates the MA along the way, you can still stay with it. How- ever, this is only true if two important criteria are met. First, the MA must still be rising. And second, the prior correction low must not be violated.
clear-cut trendline is one that connects at least three points.
CHAPTER 10
PUTTING IT ALL TOGETHER
Promise yourself that you absolutely will never again buy a stock in Stage 4 no matter how exciting the story. Also swear that you’ll never hold onto a declining Stage 4 stock no matter what rumors come your way.
- Check the market indicators for overall direction.
- Scan the groups so you’ll know which ones to zero in on.
- Cull out those few stocks with the most potentially profit- able formation within those favorable groups.
Once you’ve taken these steps, here are some rules to follow:
• If you’re an investor, do most of your buying early in Stage 2, when major bases are being completed.
• If you’re a trader, concentrate the majority of your buying in continuation-type buy patterns that are already in Stage 2.
• Before entering your buy order, make sure you know where your protective sell-stop will be set. If it’s too far away from the purchase price, look for a new buy or wait to purchase the stock when a safer stop level forms. The converse is true when selling short.
• Never sell a stock that’s in Stages 1 or 2 (especially Stage 2).
• Never buy a stock that’s in Stage 3 or 4 (especially Stage 4).
• Never hold a long or short without a protective stop.
• Never guess a bottom. Learn the important lesson that it’s better to be late and buy in Stage 2, than to grab a stock that looks cheap but will be 40 to 50 percent cheaper later in Stage 4.
But if upon later examination you realize that either the volume was inadequate, or the relative strength was lacking, or the group was negative, or you were influenced by a rumor, write down that error. After several months look for a com- mon denominator in your losses. We all have psychological pat- terns. When you see what your particular destructive pattern is, it will be easy for you to retrain yourself and deal with it so your investing will become even more profitable.
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