IRAinvestor.com	02/04/01
IRA Investing > Covered Calls by Mark Wnetrzak	In association with
Charting Terms and Definitions: Stages Explained!

Each week we receive a number of questions regarding terms that are commonly used when describing the technical character of an issue. One of the most well-known techniques for chart analysis comes from "Secrets for Profiting in Bull and Bear Markets", by Stan Weinstein. He describes the condition and outlook for most stocks in terms of stages. Here is a brief description of each category and how it can be used in selecting bullish candidates (such as those used in Covered-Call and Naked-Put positions) and some hints for timing your entry and exit transactions.

Stage I is the basing stage that could last for months (or even years). It is usually defined by little or no vertical movement with a long-term moving average that is basically flat. A common axiom suggests that, "The longer the base, the stronger the case" when an issue breaks-out and issues with this type of pattern have relatively low risk as there is little downside potential remaining.

Stage II is when the issue begins to exhibit signs of a new upward trend. The stock price closes above a long-term moving average (150-200 dma) with the average turning up, and that is the ideal time to enter a bullish play. Investors should look for the next resistance level to identify any potential "failed rally" points. Try to focus on stocks that have room to run, picking only those issues that are in stage II climbs and buying on pullbacks to technical support (or recent trend-lines).

Some Stage II signs to look for:

Volume - This is vital! Rallying stocks climb on substantially larger volume, much more than that which occurs any time during the basing stage. This volume should not be short lived as the change in stock price is the result of supply and demand; those who want to buy versus those who want to sell. The key point is that a rise or fall in price on a small volume of shares traded is far less important than a move supported by heavy volume. If there is heavy trading on an upward move, buyers are in control of the market, and their enthusiasm for the stock often pushes it even higher. In addition, most experts say that volume precedes the direction of a stock's price and when reviewing candidates, we favor issues with bullish trends that have good volume support.

Relative strength - When a stock breaks out of a base, relative strength should cross up above the zero line into positive territory. The higher the climb to cross above the zero line, the higher the probability of a continued upward movement. The "Runner's Crouch" or building steam - A move often seen before the stock breaks out. It's usually a small dip to gather strength for the upward push above the moving average. After the issue crosses above the top of the basing area (resistance), it should also climb above the moving average. This action will start to turn the moving average up. Then the stock should begin to climb significantly and as it corrects back to the moving average, the next rally should create a new near-term high.

Stage III is the area where the stock begins to encounter weakness and fails to make new highs. It is defined by sideways trend in the issue and a crisscrossing of the moving averages. This is the place to tighten stop losses and take profits if the rally fails to continue. Always allow for a possible resumption of stage II.

Stage IV is when an up-trend breaks down completely, with the stock falling through it's long-term moving average and then failing to rebound above it. The moving average will turn downward as the stock continues to fall and make new lows. When a stock enters Stage IV, there is usually a last chance to sell on a move back up, towards the long-term moving average. When entering bearish positions look for support areas so as to make sure a stock has room to fall before "shorting" the stock or buying a put. Many traders will use rallies to resistance areas to initiate shorts and then cover as a stock approaches a support area.

Good Luck!