SECRETS OF PROFITING IN BULL AND BEAR MARKETS BY STAN WEINSTEIN

Unlocking Market Secrets: A Guide to Stan Weinstein’s Technical Approach

Many investors are drawn to the stock market by seemingly simple advice like “buy low, sell high”. However, as noted in the sources, such clichés often lead to losses rather than profits. Stan Weinstein, author of Secrets for Profiting in Bull and Bear Markets, offers a different philosophy: buying high and selling higher. His approach, detailed in the sources, champions a technical methodology focused on deciphering the market’s inherent clues rather than relying on financial news, economic reports, or the often-misguided advice of Wall Street “wunderkinds”.

Weinstein stresses that successful investing isn’t about luck, but about understanding and consistently applying the right rules. His system, refined over 25 years, has enabled publications like The Professional Tape Reader to accurately forecast bull and bear markets. This approach is applicable across various markets, including stocks, mutual funds, options, and futures.

The Core: Stan Weinstein’s Philosophy of Investing

At the heart of Weinstein’s method is consistency and discipline. He urges investors to avoid switching between fundamental and technical approaches or constantly changing indicators. Instead, find a robust method, like his technical analysis, and stick with it.

Weinstein’s technical approach relies on the study of price and volume relationships to gain insight into future trends. He argues that the market is a discounting mechanism, meaning current stock prices already incorporate all known news and future expectations, rendering belated news analysis unprofitable. Real market professionals, like exchange specialists, base their decisions on market actions, not news.

He asserts that you don’t need to be right all the time; consistently following his methods will make you right a very high percentage of the time. The key is to “let your profits run and cut your losses quickly”.

Mastering the Four Market Stages

A cornerstone of Weinstein’s methodology is Stage Analysis, which categorizes a stock’s major price cycle into four distinct stages:

• Stage 1: The Basing Area
  • Description: After a decline, a stock loses downside momentum and begins to trend sideways, indicating a balance between buyers and sellers. Volume typically lessens or dries up, though it may expand late in this stage as determined buyers enter. The 30-week Moving Average (MA) flattens, and the stock intermittently crosses above and below it.
  • Action: This stage is not ideal for buying, as capital can be tied up for extended periods with little movement. Premature investors often sell out of impatience right before the big move.
• Stage 2: The Advancing Phase
  • Description: This is the ideal time to buy. A stock breaks out above its resistance zone and the 30-week MA on impressive volume. The 30-week MA usually begins to turn up shortly after the breakout, and the stock forms a series of higher peaks and higher lows, staying above the rising MA.
  • Action: Buy on the initial breakout or, for lower risk, on the pullback towards the breakout point (which often occurs on decreased volume). Weinstein advises investors to buy half their position on the initial breakout and the other half on a pullback. Traders may buy the entire position on breakout for faster action. Fundamentals will often appear negative at this perfect buying moment.
• Stage 3: The Top Area
  • Description: The upward advance loses momentum and the stock starts trending sideways, as buyers and sellers reach equilibrium again. Volume is usually heavy, and moves are sharp and choppy (what is called “churning”). The 30-week MA flattens, and the stock moves above and below it on rallies and declines.
  • Action: Traders should exit with profits. Investors can consider taking profits on half their position, protecting the remainder with a protective sell-stop just below the new support level. It’s crucial to keep emotions in check here, as news tends to be glowing (e.g., good earnings, stock splits). Never buy a stock in Stage 3, as the reward/risk ratio is unfavorable.
• Stage 4: The Declining Phase
  • Description: The stock breaks below the bottom of its support zone, entering a downtrend with a declining 30-week MA. A volume increase on the breakdown is bearish, but not strictly necessary for validity, as stocks “can literally fall of their own weight”. Upside potential is minimal, and downside risk is considerable.
  • Action: Never buy or hold a stock in Stage 4. This is a time to sell and avoid. Averaging down (buying more at lower prices) in Stage 4 is a “suicidal” tactic.

Refining Your Buying and Selling Decisions

Beyond Stage Analysis, several factors refine the buying process:

• Resistance: The less overhead resistance, the better. Breakouts into “virgin territory” (new highs beyond years of prior trading) are the most bullish situations, as there are no sellers looking to “get out even”.
• Volume on Breakout: For buying, volume confirmation is crucial. On a breakout, volume should be at least twice the average of the past month, or show a significant build-up over several weeks. Low-volume breakouts have a higher probability of being false.
• Relative Strength (RS): This measures a stock’s performance in relation to the overall market. Always check the RS line.
  • Favorable RS: Stock performs better than the market, or the RS line trends higher and moves into positive territory at the breakout.
  • Unfavorable RS: Stock lags the market, or the RS line is in a downtrend, especially if it’s in negative territory. Avoid buying stocks with poor relative strength, even if other factors seem positive.

Weinstein identifies “Triple Confirmation” patterns for uncovering exceptional winners, typically for aggressive investors:

1. Explosive Volume: Substantially larger volume on the breakout (more than twice the average of the past four weeks), which continues heavily for several weeks.
2. Relative Strength Shift: The RS line moves decisively from negative or neutral territory into positive territory at the Stage 2 breakout.
3. Significant Base Action: The stock has already risen 40-50% or more within its Stage 1 base before the breakout, indicating underlying power.

When to Sell: Protecting Your Profits and Minimizing Losses

The sell decision is paramount for success. Weinstein highlights common pitfalls: selling based on tax considerations, dividend yield, or a high/low P/E ratio. Instead, he advocates for an objective, disciplined approach using protective sell-stops.

• Protective Sell-Stops: Never hold any position without a protective sell-stop. These orders are executed only if a predetermined price level is hit, transforming into a market order to sell. Place them on a good-’til-canceled (GTC) basis. Crucially, do not set stops based on arbitrary percentages (e.g., 10-15% below current price); instead, base them on prior support levels and the 30-week MA. For greater precision, set stops just under psychological “round numbers” (e.g., 17 7/8 instead of 18).
• Adjusting Stops: As a stock advances in Stage 2, trail the sell-stop higher. For investors, raise the stop below the prior correction low or below the rising 30-week MA. Once the MA flattens (indicating a potential Stage 3 top), become more aggressive and tighten the stop closer to the correction low. Traders use even tighter stops to exit positions earlier and avoid sideways movement.

The Less Traveled Road: Selling Short

Short selling is the practice of profiting from a stock’s decline by selling borrowed shares with the expectation of repurchasing them at a lower price. While often feared, Weinstein argues it’s no riskier than buying, provided protective buy-stops are used. Stocks tend to fall faster than they rise due to fear.

• When to Sell Short: Look for stocks in Stage 3 (topping area) with a flat or declining MA, or already in Stage 4 (declining phase).
  • Entry Points: Traders should sell short their entire position on the initial breakdown from Stage 3. Conservative investors might sell half on the breakdown and half on a pullback towards the breakdown area.
  • Market & Group Context: The overall market trend should ideally be bearish. The specific industry group should also be showing weakness.
  • Individual Chart: Look for a stock that had a significant run-up before topping, and has minimal support below the breakdown point.
  • Relative Strength: Should be trending lower or moving into negative territory at the breakdown.
  • Volume: Unlike buying breakouts, volume is NOT a necessary ingredient for a valid downside breakdown. Stocks “can truly fall of their own weight”.
• Protective Buy-Stops: Just like sell-stops for long positions, always use a protective buy-stop for short sales. This limits your maximum loss. Place it just above prior rally peaks or a suitable percentage above the short-sale price (4-6% for traders). Lower the buy-stop methodically as the stock declines.

Long-Term Market Indicators: Spotting Bull and Bear Markets

To position yourself correctly, it’s vital to assess the overall market trend using key long-term indicators:

• Stage Analysis for Market Averages: Apply Stage Analysis to broad market indices like the Dow Jones Industrial Average (DJIA) using its 30-week MA. A market breaking into Stage 4 (below declining 30-week MA) signals a bear market, while a breakout from Stage 1 (above a flattening/rising 30-week MA) signals a bull market.
• Advance-Decline Line (A-D Line): This cumulative line tracks the net difference between advancing and declining issues on the NYSE.
  • Negative Divergence: If the DJIA makes new highs but the A-D line fails to confirm with its own new highs, it’s a bearish warning. This often precedes major tops by several months.
  • Positive Divergence: If the DJIA makes new lows, but the A-D line holds above its prior lows or shows an improving trend, it’s a bullish signal that a market bottom is forming.
• Momentum Index (MI): A 200-day moving average of NYSE advance-decline figures. A cross above the zero line is bullish; a drop below is bearish. It often leads the market at tops and confirms at bottoms.
• World Market Averages: Monitoring major global stock markets can provide leading signals for the U.S. market, especially when there’s broad agreement across multiple markets.
• General Motors (GM) Chart: Applying Stage Analysis to GM, a historically significant stock, can offer valuable insights. Divergences between GM’s performance and the overall market averages often foreshadow turns.
• Price/Dividend (P/D) Ratio: A fundamental long-term indicator calculated as the DJIA price divided by its annual dividend payout. Low readings (e.g., 14-17) suggest cheapness and potential bottoms, while high readings (e.g., above 26, or extremely above 30) suggest expensiveness and potential tops. This is a long-term gauge, not a precise timing tool.
• Theory of Contrary Opinion: This subjective but powerful tool suggests that the market often does the opposite of what the majority expects, especially when sentiment becomes extreme and is widely echoed in media headlines.

Beyond Stocks: Applying Stage Analysis to Other Instruments

Weinstein emphasizes that the principles of Stage Analysis are universal for anything governed by supply and demand.

• Mutual Funds: Ideal for investors who want diversification and less time commitment. Use weekly charts with a 30-week MA to switch between aggressive stock funds and money market funds. Sector funds offer narrower, potentially higher-reward opportunities within specific industries.
• Options (Calls and Puts): High-risk, high-reward vehicles suitable only for aggressive, disciplined players.
  • Key Rules: Buy calls only on Stage 2 stocks, and puts only on Stage 4 stocks. Focus on options with significant potential, reasonable time to expiration (3 months, never less than 45-50 days), and that are slightly “in the money” (meaning the stock price is already favorably past the strike price). Use very tight mental stops on the underlying common stock.
• Futures Contracts: Applicable for commodities (e.g., orange juice) and stock index futures (e.g., S&P 500). Requires a shorter time frame (e.g., daily charts, 40-day MA) and more constant monitoring due to faster movements and higher leverage.

Putting It All Together: Your Path to Profit

Weinstein’s book culminates by stressing the importance of a comprehensive game plan. The journey begins by:

1. Checking the overall market trend using long-term indicators.
2. Identifying the strongest and weakest industry groups.
3. Culling out the most promising individual stock patterns within favorable groups.

Key “Don’t Commandments” to live by:

• Never buy a stock in Stage 3 or 4.
• Never sell a stock in Stage 1 or 2.
• Never hold a long or short position without a protective stop.
• Never guess a bottom; buy on breakouts.
• Never be afraid to sell short in a bear market.
• Never fight the tape; always be in harmony with price and volume action.

By embracing this disciplined, objective, chart-driven approach, you can avoid common pitfalls, protect your capital, and position yourself for substantial profits. As Weinstein aptly puts it, you will make decisions in a rational manner, leading to peace of mind and dramatically improved market results.

Think of it like being a seasoned sailor. Instead of chasing fleeting weather reports or listening to the gossiping passengers, you learn to read the currents, understand the prevailing winds, and trust your instruments. You know when to hoist the full sails for a swift journey and when to reef them down or even drop anchor during a storm. You won’t always avoid every ripple, but you’ll navigate the turbulent seas with confidence, reaching your destination (profit) far more often than those who merely drift with the tide.

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