Stan Weinstein's Stage Analysis: Which Stage Is Your Share In?

A share that looks cheap

Somebody tells you about a share that has fallen a long way. “It is so cheap now,” they say. “How much lower can it go?”

Stan Weinstein would not answer that question. He would ask a different one. Which stage is it in?

His book says every share moves through the same four stages, again and again. A flat base. A rise. A flat top. A fall. If you can tell which stage a chart is in, you know whether to look closer or walk away.

The slow line is the person walking. The price is the dog on the leash. The dog darts about, but the direction of the walk is the trend. On the climb the dog stays ahead. On the fall it stays behind.

A share that has fallen a long way is often still in stage 4. Lower is not the same as cheap. That is the first thing the book asks you to accept.

One line on the weekly chart

Weinstein does almost everything with one line. He opens a weekly chart, where each bar is a week, and adds a 30-week moving average.

Two things matter. Is the price above the line or below it? And is the line itself rising, flat or falling?

Weekly bars are the point. A daily chart jumps around with every piece of news. A weekly chart shows you the walk, not every step the dog takes.

Stage 4. One good week does not change the direction of the walk. The dog ran ahead for a moment. The walker is still heading downhill.

The four stages in plain words

Here is what each stage looks like, and what the method does in each one.

Stage 1 and stage 3 look almost alike. Both are flat stretches where the price crosses the line. The only difference is what came before. A flat stretch after a long fall is a base. A flat stretch after a long rise is a top.

That sounds simple. But the book is not mainly about reading one chart. It starts much further back.

Start with the forest

Weinstein calls his order “the forest to the trees”. You look at the whole market first. Then at the group of shares a company belongs to. Only then at the company itself.

A good tree in a dying forest usually struggles. So the method checks the forest first, then the grove, and only then the tree.

His reason is practical. Most shares follow the market most of the time. A fine chart in a falling market is swimming against the tide. A fine chart in a rising market, in a rising sector, has the tide behind it.

So he asks the same stage question three times. Which stage is the market in? Which stage is the sector in? Which stage is the share in? He wants all three to answer “stage 2”.

But how do you read the stage of a whole market? An index is one line, and one line can lie.

Are most shares joining in?

This is where market breadth comes in. It asks how many shares are taking part in a move, not just how far the index moved.

Big indices are weighted by company size. A handful of very large companies can lift the index while most shares drift lower. The index looks healthy. The market underneath it is not.

From the shore both boats look fine. The top one depends on two people who will get tired. Breadth is the way to see which boat the market is.

Not necessarily. Weinstein watched the running count of rising shares minus falling shares, called the advance-decline line. Breadth readers today also track what share of stocks sit above their own long average. When the index keeps rising but those counts start falling, fewer people are rowing. He treated that as an early warning.

What this looks like in India

The method was built on American charts. Here is what changes when you run it on NSE.

Two more India facts matter. Banking shares carry a lot of weight in the big indices, so a weak banking sector can drag the whole picture down. And costs are real: brokerage, securities transaction tax, stamp duty, and a higher tax on short-term gains. None of them show on a chart.

If you want to see the method under stress here, read about India’s 2008 fall or the 2020 crash. Both are worth an evening with a breadth chart open beside the index.

The breakout he waits for

So the market and the sector look like stage 2. Now what does Weinstein want to see in the share itself?

He wants the moment it leaves stage 1. The price has spent months under a ceiling, a level where sellers kept turning up. Then one week it closes above that ceiling. That is the breakout.

The price pushes against the same level several times. When it finally closes above it, he wants the volume bar that week to stand far taller than usual. A breakout on quiet volume is one he distrusts.

His rule of thumb is volume at least double the recent average on the breakout week. Heavy buying says real buyers arrived. Light buying says it may be a drift that falls back.

He also checks what is above the breakout. Was the share much higher a year or two ago? Then many people bought up there. They are waiting to get their money back, and they will sell into any rise. He prefers breakouts with little of that old supply overhead.

Stronger than the market

A share can be in stage 2 and still trail the market. Weinstein wants the ones leading it. He measures that with relative strength.

He does not ask whether the share went up. Everything goes up in a good market. He asks whether it went up more than the market, and whether that gap is still growing.

In a falling market this idea helps too. A share that falls less than the market is showing strength. When the market turns, those are often the first to move.

So now you have the full buy picture. Market in stage 2. Sector in stage 2. Share breaking out of stage 1 on heavy volume, with the relative strength line rising. Most of the book is about getting here. Most of the results depend on what happens next.

When to sell: the ratchet

Buying is the part people enjoy. Weinstein spends real effort on the part they avoid. When do you get out?

His answer is a stop placed from the chart, not from a fixed percentage. At first it sits just under the low of the base. As the share climbs, it pulls back now and then. Say a pullback holds and the price goes on to a new high. Then he moves the stop up to just under that pullback low.

Each step up locks in a little more. The stop never moves down. When the price finally falls through the last step, the trade is over, however the story sounds.

It says sell. The stop was the plan, and the plan was made while you were calm. Good news at that moment is exactly what makes people lower their stop. For longer holders, Weinstein also watches the 30-week line. A close below it, with the line starting to flatten, says stage 2 may be ending.

Good news at the top, bad news at the bottom

Why would a share fall while the news is good? Weinstein’s answer is that prices move before the story does.

A base forms while every report is still gloomy, because the selling is nearly done. A top forms while every report is still cheerful, because the buying is nearly done. The chart often turns before the story does.

This is why he tells readers to trust the chart over the headlines. At a stage 3 top, the news is usually excellent. The people who bought early are quietly selling to the people reading that news.

He applies the same logic in reverse. In stage 4 he never buys, however cheap the share looks. Bolder readers can sell short there, which means profiting from a fall. He notes that a share can break down without the heavy volume a breakout needs. Falling takes less effort than rising.

Where the method breaks

Every method has a weak spot. Weinstein’s is the sideways market.

If the slow line is flat and the price keeps crossing it, every crossing looks like a signal. Most are not. Each one costs a small loss and some brokerage.

Stage 1 can last far longer than you expect. Breakouts fail and fall back into the base. A stop under the low gets hit, and then the share takes off without you. None of this means the method is broken. It means the method loses small amounts often, and needs the few big stage 2 runs to pay for them.

The labels are also a judgement. Two people can look at the same chart and disagree on whether it is late stage 2 or early stage 3. Software that sorts charts into stages gets a fair share wrong, especially on bases. Every screen needs a human look.

And it is a 1988 book about American markets. The weekly chart and the slow line travel well. Circuit limits, thin trading and the tax on short-term gains are Indian facts the book never had to deal with.

A practical checklist

Looking at a chart the way the book does

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You can do all of this with a free broker app and the NSE website. It is a way of looking, not a recommendation to buy, hold or sell anything.

• Open the Nifty 500 chart, set it to weekly, and add a 30-week average. Is the price above the line, and is the line rising?The method checks the whole market before any single share.
• Look up the daily count of rising and falling shares on the NSE website for the last few weeks. Are more shares rising than falling on most days?An index can rise while most shares fall. The count shows which is happening.
• Open the share you are curious about on the same weekly chart with the same line. Does it look like a base, a climb, a top or a fall?A share in stage 4 is not cheap. It is falling.
• Find the week the price crossed its old ceiling and look at the volume bar under it. Is that bar clearly taller than the bars before it?A breakout on quiet volume is the kind the book distrusts.
• Write down the price where the method would say the idea is wrong, just under the last low. Could a lower circuit stop you from selling there?An exit that cannot be taken is a hope, not a plan.
• Check whether your broker app offers a GTT order. Can you set that exit price in advance, so you do not have to watch the screen?A stop set while calm is easier to keep than one decided in a fall.
• Work out in rupees what you would lose if that exit price is hit. Is it an amount you could lose without changing your plans?The size of a loss matters more than whether the chart looked good.

Nothing on this list tells you what to buy or sell. Every line is something to look up or write down.

Check yourself

4 questions

Answer in your head first. Guessing and being wrong still helps you remember.

1. 01What is the only difference between stage 1 and stage 3?Show

   What came before. Both are flat stretches where the price crosses a flat line. After a long fall it is a base. After a long rise it is a top.

2. 02Why does Weinstein look at the market before the share?Show

   Because most shares follow the market most of the time. A good chart in a falling market is fighting the tide.

3. 03The index is rising, but fewer shares are above their long average each week. What is breadth saying?Show

   Fewer shares are carrying the rise. The move is getting narrower, which he treated as an early warning, not as a signal to act on its own.

4. 04Why does the stop only move up?Show

   Because lowering it is how a small planned loss becomes a large unplanned one. Moving it up under each held low locks in part of the gain.

Credit where it is due

Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets, by Stan Weinstein, was published by Dow Jones-Irwin in 1988. Weinstein ran a market newsletter, The Professional Tape Reader, for many years.

This article covers the spine of the method. It leaves out his many worked chart examples, his fuller set of market indicators and his detailed short selling rules. Those are the reason to read the book itself, slowly, with a chart open beside it.