"Knowing where each stock is within its particular cycle is what timing is all about," says Stan Weinstein, author of "Stan Weinstein's Secrets of Profiting in Bull and Bear Markets" and publisher of the Professional Tape Reader.
Weinstein, who was Timer Digest's Timer of the Year for stocks in 1987 and for both gold and bonds in 1988, is the originator of the stage-analysis concept of stock timing.According to Weinstein: "Each stock is always in one of four readily identifiable stages. The trick is to identify which stage is which." The four stages are: 1. the basing area; 2. the advancing stage; 3. the top area; 4. the declining stage.
The basing area, says Weinstein, is reached when, after a prolonged decline, a stock finally begins to move sideways as the remaining sellers battle it out with the potential buyers. During this stage a series of swings occurs between support and resistance as the stock's base forms. Weinstein warns against trying to profit by these swings.
"Since base-building can go on for months, or even years, it doesn't do much good to do new buying during it. Even if you catch the exact low, your money can be tied up for a long time with little movement. But you do want to watch such base-building closely because when a base-building stock finally breaks out on the upside, it enters the advancing stage, the optimum time to buy."
The advancing stage begins, says Weinstein, when the stock breaks out across the top of its base and also its moving average. He believes this should happen on heavy volume or the move is suspect.
"Now you're in the uptrend and the situation becomes a buyer's dream as each successive rally peak is higher (as are the lows on corrections). But watch out. When the stock starts to sag nearer its moving average, that's the start of . . ."
The top area. This occurs, says Weinstein, when, instead of further upside progress, there's a lot of churning between sellers and buyers as the stock heads sideways. At this time, the stock usually starts to crisscross its moving average. Once you spot a stock in a developing top area, Weinstein warns, sell out or at least protect your capital with a stop loss order. Good news (earnings, new products) is typical of a topping stock.
The declining stage, the last stage, begins when the stock breaks down from its top area. Each rally peak fails to better its predecessors and each new low goes lower than the one before.
"This is the stage where amateurs try to grab a bargain because they think the stock has fallen far enough," Weinstein concludes. "But never buy a stock, no matter how cheap it appears based on fundamentals or a recent sharp decline, if it is trading below its declining 30-week moving average. The price performance is giving you a clear signal that there's a worm in the apple."
(Professional Tape Reader, P.O. Box 2407, Hollywood, FL 33022; biweekly, $275 annually.)
(Investor's Notebook reflects the opinions of professionals. It does not endorse specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.)