Stage Analysis Journal

[isatrader]

My aim with this journal is to forward test Stan Weinstein’s four-stage breakout method that he describes in his book from 1988. As with hindsight, you can see that the method works beautifully to this day. However, it’s not as easy to make decisions at the right edge of the chart that look obvious with hindsight. So I plan to follow his method as closely as possible, but I’m also going to use point and figure charting methods for additional confirmation and to aid with the stage identification and breakout points.

I like to read a lot and have tried various methods over the last four years since I began to learn to trade and I imagine I’ve got many more years to go yet before I become consistently profitable. However, my goal in the short term is to try and develop my discipline and to stay focused while I test this method and not deviate from my plan. As I need to be consistent in my approach to see whether the system works or not, as otherwise I might disregard the method if I fail, when it was actually not the fault of the system, but my own short comings that caused the failure.

I’m currently on my third reading of Weinstein’s book as I’m keen to fine-tune my understanding of the four stages so that I can try to identify the A+ situations that he talks about, which are most likely to turn into the biggest winners over time and try to avoid the C- mediocre buys and false breakouts.

I won’t go into the whole method in this first post, but it is based on buying breakouts when the general market trend is positive; that are in the strongest sectors; that are breaking out into stage 2 with minimum overhead resistance; which have strong increasing volume on the breakout and also have good relative strength versus the market overall.

The method is based on buying stocks, but is also supposed to work just as well on commodities and indexes. However, from studying the charts I don’t think it is as suited to forex, although the stage analysis still seems to work very well, so I think it could still be a useful method in the toolbox for fx. But I’m going to limit my trades to stocks, indexes and commodities only to begin with and see how I get on.

I hope you enjoy the journal and I will appreciate any constructive feedback, especially from people that have tried the method or trade in this way.

Cheers

 

[isatrader]

Dollar Index Stage Analysis

Charts moving into stage 2 are thin on the ground at the moment, but attached is the US Dollar index chart. It has recently broken out of a stage 1 consolidation that started forming back in April this year. The 30 week moving average has turned higher for the first time in over a year. Volume has increased on the breakout from the range and relative strength versus the S&P 500 has increased and moved into positive territory. So by my interpretation of the method this is the beginning of a new stage 2 uptrend. However, although it meets the majority of the criteria in Weinstein's method, one crucial area is not so positive - overhead resistance. There is significant resistance above the breakout which will likely limit any advance that it tries to make. The 82 level looks like strong resistance in the short term IMO, which could be bullish for stocks and commodities if it tops there and begins a new range.

 

[isatrader]

US 30 Year Treasuries Stage Analysis

The US 30 year has had a fairly model stage 2 since it's breakout in early May. It moved up to previous resistance on increasing volume, then pulled back towards the breakout level and the volume contracted giving a second lower risk entry point early in July. Currently it's still in a strong stage 2 rally. However, it's a bit extended from it's 30 week MA, so the trader stop loss position would move inside the MA to below the most recent low which is around the 137.50 level. But the investor stop would be just below 130 I think.

I've included the daily chart as well on the attached chart below.

 

[isatrader]

Buying Guide

As the market trend is in a stage 4 downtrend at the moment and I'm already short the S&P 500 from this weeks bounce to the near the top of the daily channel yesterday. I'm going to spend some time over the next few weeks/month studying the method more and trying to get some watch lists set up of stocks/commodities in stages 1 and 2 and that are outperforming the market since the August low, so that if the market trend turns positive again over the next month, that I'm ready to buy the best looking candidates.

I've been reading over the refining the buying process section again today and thought it would be useful for me to write down the buying reference on the first page of my journal so that I can find it easily in future.

Buying Reference

1. What is the major trend of the market overall
2. What groups/sectors look the best technically
3. Create a watchlist of the stocks from the sectors identified that have bullish patterns but are currently in a trading range. Make a note of the breakout price level of each.
4. Narrow the list by discarding the stocks/commodities that have nearby overhead resistance.
5. Narrow the list further by discarding the ones with the worst relative performance versus the genaral market - I use the latest major low in the S&P 500 a my base line for this.
6. Put buy-stop orders for half the position on the few stocks/commodities that meet the buying criteria.
7. If volume looks promising on the breakout and then contracts on the pullback towards the initial breakout level, then buy the remaining half of the position.
8. If volume doesn't increase enough on the breakout then sell on the first rally. If it doesn't manage to rally and falls back below the breakout point then dump it immediately.

So that's the quick reference of the most important things to do when buying with the method, which I'm going to try to stick to from now on.