Trade Like Stock Market Wizard Flashcards
Four stages of a stock’s life cycle
- Stage 1—Neglect phase: consolidation
- Stage 2—Advancing phase: accumulation
- Stage 3—Topping phase: distribution
- Stage 4—Declining phase: capitulation
Stage 1 characteristics
- stock moves sideways while lacking any sustained movement up or down
- price oscillates around 200 day MA while lacking any trend
- Volume generally contracts and is relatively light compared to stage 4 decline
Before you conclude that a stage 2 advance is under way and consider buying, there should always be a _______ with an ______ off the _______
- previous rally;
- escalation in price of at least 25-30%;
- 52-week low
Stage 1 to 2 transition criteria
- Price is above both 150-day and 200-day MA
- 150- day MA is above 200-day
- The 200-day MA has turned up
- Series of higher highs and higher lows
- Large up weeks on volume spikes contrasted by low-volume pullbacks
- More up weeks on volume than down weeks on volume
Stage 2 characteristics
- Price is above 200-day (40-week) MA
- 200-day MA is in an uptrend
- 150-day (30-week) MA is above 200-day MA
- Price is in a clear uptrend, defined by higher highs and higher lows in a staircase pattern
- Short-term MAs are above long-term MAs
- Volume spikes on big up days and big up weeks are contrasted by volume contractions during normal price pullbacks
- More up days and up weeks on above-average volume than down days and down weeks on above-average volume
Stage 3 characteristics
- Volatility increases, with stock moving back and forth in wider, looser swings. Price pattern may look similar to stage 2, with the stock moving higher, but price movement is much more erratic.
- There is usually a major price break on an increase in volume. Often, it’s the largest one-day and/or one-week decline since the beginning of the stage 2 advance.
- Price may undercut 200 day MA. Many stocks in stage 3 bounce below and above the 200 day MA several times while topping out.
- 200 day MA loses upside momentum, flattens out, then turns downward.
Stage 4 characteristics
- Majority of price action is below 200 day MA
- 200 day MA is in a definite downtrend
- Price near or hitting new 52-week lows
- Series of lower lows and lower highs, staircase downwards.
- Short-term MAs below long-term MAs
- Volume spikes on big down days and big down weeks contrasted by low-volume rallies
Stage 2 trend template
- Price is above 150-day and 200-day MA
- 150 day is above 200-day MA
- 200-day MA is trending up for at least 1 month (preferably 4-5 months minimum)
- 50-day MA is above 150 and 200-day MA
- Price is above 50-day MA
- Price is at least 30% above 52-week low. (Many of the best will be 100, 300% or greater above 52-week low before they emerge from a solid consolidation period)
- Price is within at least 25% of 52-week high
After a run upward, there is _____, causing a ______, during which the stock ________.
-profit taking
-temporary pullback
-builds a base
A stock generally tops out after ______
three to five bases have formed in a stage 2 uptrend
Bases 1 and 2
-Generally come off a market correction
-best time to jump on board a new trend
Base 3
-a little more obvious but still tradable
Base 4 or 5
-if it gets this far, trend is extremely obvious and is in its late stages
-at this point, abrupt base failures occur more frequently
-some stops however will end in a climax run
What to watch out for to determine if the market is looking favorably on a company’s earnings
- Initial response. Did the stock rally or sell off? If it sold off, does it resume its slide after a dead cat bounce? Or does the price come roaring back?
- Subsequent resistance. How well did it hold gains and resist profit taking?
- Resilience. Did the stock recover quickly and powerfully? Or did it fail to rally after a pullback or, worse, sell off?
Signs a bear market is bottoming
- First wave of market leaders emerge and build bases in a staircase.
- Stock set-ups proliferate. Original leaders give up relatively little ground and rebound fairly quickly from any sell-off. Leading stocks will generally advance 15-20% the rest, during which they may pull back 5-10%.
- Majority of leaders emerge successfully without crashing back down and unable to rally.
- Volume on major averages should be watched for signs of distribution. If accompanied by increasing volume on down days versus up days, it may be too early and you may need to revert back to cash.
