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Comparison Of Bear Markets: Weinstein Stage Analysis at Trader’s Narrative





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Persevering readers will know of my admiration for Stan Weinstein and his classic book: Secrets for Profiting in Bull and Bear Markets

Stan Weinstein book cover look inside

If you haven’t yet discovered this gem, don’t let the silly title fool you. Pick up a copy at Amazon - although, I just noticed that it is temporarily out of stock!

So either order it new and wait until it is available again or order one of the used copies and get it fast. But don’t leave this book out of your trading library. Whether novice or experienced, you’ll learn something because the principles outlined in Weinstein’s book are timeless. For other books that I recommend, check out the About section.

One of the major themes in the book is that at any point in time, any market is in one of four stages: basing, breakout or advance, topping, and decline. Each of these “stages” have specific characteristics which are rather simple to recognize.

No two market periods are alike since history never repeats. But sometimes, if you look closely, it may rhyme. So here’s a comparison of the past bear market to the current one, through the perspective of Stan Weinstein’s Stage Analysis.

Something which immediately jumps out at you, even at a cursory comparison, is the lack of powerful bear market rallies. During this bear market we just rolled over each time with no real effort by the bulls to put up a real fight.

During the last bear market, the S&P 500 Index rallied about 6 times (depending on how much you want to squint) to either approach or hit its 200 day moving average. For a few brief days in early 2002 it even traded above the ever descending long term moving average. In contrast, the most recent market action has pushed price below its long term moving average to an extent not seen since the 1929 crash.

Apart from that difference, the two bear markets do have a lot in common. To start, at the beginning of “Stage Three” the 200 day moving average flattens and the shorter, 50 day moving average crosses, falling below it (marked by “1″ on the charts).

If you want to nitpick, the long term moving average started to flatten out in early 2002 due to the massive rally from the depths of the abyss of the September 11th tragedy (marked by “a” on the charts). But the 50 day moving average remained well below it - it did not cross above it.

Throughout, the long term moving average slopes downward and holds its decline (marked by “2″ on chart) until late April 2003 when, finally, the long term moving average flattens and the 50 day moving average rises above it (marked by “3″ on the chart):

weinstein stage analysis 2000 bear market

The most recent bear market top was in October 2007 as the long term moving average flattened (marked by “1″ on the chart). It had done so once before in July 2006 but very quickly price recovered and both averages started to rise once more.

During this most recent bear market, the S&P 500 Index has only managed to trade back to its 200 day moving average once. This is where the long term moving average, temporarily flattened (marked by “a” on the chart) but the 50 day moving average remained below it.

“b” as in Bottom
The most interesting insight from such a comparison is the similarity that jumps out between points “b” on the charts. Both of them occurred when the long term and the shorter term moving average where both declining and when there was an extreme distance from price to moving averages. Both of them were “panic” or spike declines where the intensity of the selling fed on itself until reaching a crescendo and reversing sharply.

weinstein stage analysis 2007 bear market

It isn’t too difficult to imagine the same sort of conclusion. One where the market falls once more but not beyond the swing lows it has already marked. This allows for the sideways action or basing which ameliorates the steep slope of the 200 day moving average and eventually sets up for a final push which takes price, along with the 50 day moving average, above the long term average.

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12 Responses to “Comparison Of Bear Markets: Weinstein Stage Analysis”  

  1. 1 Paul Leung

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    Excellent!

  2. 2 jeremy

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    Well done, yes, excellent.

  3. 3 christopher brecher

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    I already had a copy of this book,and last weekend bought another one for 1 dollar.I opened it up and it was signed by Stan in 1988!!!!..

  4. 4 Babak

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    Thanks guys.

    christopher, that’s unbelievable! time to buy a lottery ticket ;-)

  5. 5 jeremy

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    Babak, would you say such a comparison indicates that the current rally will continue, to say SP500 900, BEFORE CAPITUALTION and possible retest of the lows as the market realizes that the E of the PE won’t bounce back soon?

  6. 6 Babak

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    jeremy, just saw this, honestly with the way things are going now I would be really surprised to see an April 2003 scenario unfold where we just barrel ahead, and damn the overbought technicals, the sentiment, the overhead resistance etc.

  7. 7 jeremy

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    Babak, as long as we keep having positive suprises, earnings, G20, Libor down, VIX down, i think peoples enthusiasm to not miss the bottom will i think over-ride sentiment, but once the momentum stops, reality will strike.

  8. 8 colin

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    Hi Babak
    I see you use a 200ma and 50ma, but Stan uses a 30wk ma (and 10wk ma ,which admittedly is 50 days).

    Just wondering why you use a 200ma. Alos he just uses one at a time ,not both ie crossovers.

    Intested to hear your reasoning.

    thx
    colin

  9. 9 Babak

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    colin, you’re right but I don’t think it really matters whether we’re looking at 150 or 200. The important thing is the overall picture and the other variables - like sentiment - that we bring to bear on the issue. Also, it is important to be consistent. Just choose one you prefer and stick to it. Finally, Weinstein doesn’t use cross-overs but rather relies on their slope. Each moving average has its use, the short/intermediate term (from a swing trading pov) and the long term.

  10. 10 chris

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    Why are we comparing 2001 to 2008? This recession is WAY WAY WORSE THAN 2001 !!

    We should be comparing apples with apples……the ONLY recession that is comparable to the current one….is the Great Depression….

    This recession is gonna last easily another 3-4 years and the next BULL run will only come in 5-10years time….

    There will be a new bottom…..the bottom of which is around 3000 or less for the DOW

  11. 11 Mike H

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    I am a devout follower of Stan Weinstein’s principles as outlined in his book ‘Secrets for Profiting in Bull and Bear Markets”. Do you know of any stock screening software, which may be available, to create a scan for the following?:

    - price breaking above 30 week moving average.

    - find a way to scan for stocks breaking out from a basing period (with IncredibleCharts I can use a crossover of 14 day ADX above the 20 within the last trading day to get some results).

    - volume at least double the previous month’s average

    - RSI as defined by Stan (stock’s price relative to the market).

    Thanks for any assistance you can provide.

  12. 12 wai

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    It,s excellent ! But I have problem writing RS ( relative sttrength) in metastock. As follow the fomular in page 108 : Price xyz/price of the market average , i got all positive value. Does anyone know how to write this formular correctly ? Thanks in advance.

    wai.

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