In today's newsletter, we will explore an intriguing concept known as stage analysis. This approach involves examining the different phases a stock undergoes, including accumulation, momentum, peaking, and eventual decline. Stage analysis is a valuable tool for identifying positional setups or stocks that may serve as potential candidates for swing trading.

The 4 stages a stock goes through

Stage analysis is a time-tested framework that has been utilized by successful traders for decades. Although many traders have been using this template, it was Stan Weinstein who first publicly mentioned it in his book. This methodology categorizes a stock's lifecycle into four distinct stages, each with its own defining characteristics. These characteristics enable traders to identify the current stage and make informed decisions accordingly. By mastering stage analysis, traders can uncover stocks with potential momentum while gaining a clearer understanding of what to anticipate from the charts.

Stage analysis includes 4 stages:

Stage 1: The Base
Stage 2: The Advance
Stage 3: The Topping out
Stage 4: The Decline

Compared to other stages, it is The Advance Stage that experiences the greatest rise in the stock’s price. Let us understand each of these stages and their characteristics.

Stage 1: The Base

Stage 1 is The Base. As the name suggests, the price is currently forming a base. In modern technical analysis terms, the price is in consolidation. Consolidation can mean a ‘Cup’ formation or a Rectangle formation. Prior to this ‘Base’ formation, the price has declined by a considerable amount. The price has declined to a level where the buyer and sellers are in an equilibrium.

The slope of the EMA has gone from sloping downwards to sloping sideways. The price hovers around the EMA line. The volume in the stock is low. The volume increases when the price is ready to move from stage 1 to stage 2.

Observe the stock below of HUDCO. The line marked is the 150 period EMA line. The price declined in Jul 2021 and later consolidated to form a cup like pattern till Nov 2022. Later, the EMA started to slope upwards supported with high volume during up days.

Stage 2: The Advance

During this phase, the price begins its upward movement, entering a period of momentum. The price rises above the 150-day EMA, and the EMA adopts an upward slope. Volume tends to be high during price increases and lower during pullbacks, indicating that weaker participants are taking early profits while the 'Smart Money' continues to hold onto the stock.

Observe the chart again. The price had risen multi folds in a matter of a year and half. The price entered the Stage 2 in Nov 2022. The price rose from 53/- in Jan 2023 to 342/- to Jul 2024, a move of ~540%.

This stage presents a great opportunity for traders to capitalize on swing or positional trades, provided the entry is well-timed with an optimal risk-to-reward balance. My course, How to Trade Breakout and Pullback, provides a comprehensive guide to strategies specifically designed for breakout and pullback systems. It also highlights the key patterns and indicators, beyond the EMA, that can help you make informed trading decisions. To learn how to effectively trade stocks in Stage 2 and refine your approach with proven techniques, consider exploring the course.

Stage 3: The Topping out

This is an exhaustion stage. The stock price has run its course. The price starts to form a top in this phase and gets into a consolidation phase. The buyers are now exhausted, and the sellers are gaining control. The only reason there is a consolidation because the seller’s pressure is met with buying from participants who are ‘late to the party’. These weak hands are now entering at a level where the price is consolidating, with an expectation of the price going higher.

The EMA starts sloping sideways and the price starts hovering around the EMA line. Once the price breaks the EMA line, it is an easy signal to exit the stock. If the price breaks out again, then re-participation can be explored as an option. Once the low of this base is breached, then the price can enter a quick decline.

Observe the chart again. The price declined after Jul 2024 and is now hovering around the 150-day EMA line as of Jan 2025.

Stage 4: The Decline

Once the low of the base is breached, the descent starts. The sellers have increased in number. The ‘Smart money’ have already exited the stock. This stage doesn’t require the volume to be high. The price can decline more quickly than it had risen.

This stage can usually lead to stage 1 again. But this will require a change in the fundamentals of the company. A new product, service, management or other catalysts can start the stage cycle again. The right time to exit the stock is when the price starts to enter the stage 3. (The EMA line can be a great tool here 🤫🤫).

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Stage analysis is one of the most powerful yet underappreciated concepts in the world of technical analysis. If you are eager to explore more such technical analysis concepts, consider joining TNT One. This exclusive membership provides access to India's most comprehensive library of resources on Noiseless charts and other time-tested trading strategies. Designed to cater to traders at every stage of their journey, TNT One offers something valuable for everyone, whether you are a beginner or an experienced trader.

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