Trader’s Narrative

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

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):
Continue reading ‘Comparison Of Bear Markets: Weinstein Stage Analysis’

Stan Weinstein was the guest for Market Monitor on Friday’s Nightly Business Report. In his previous interview back in September 2007, Weinstein warned of a potential bear market if we penetrated 12,800 on the Dow. If you follow the link, you can see a long term chart showing the significance of that level.

Of course, we did break through that level and we are in a bear market. So what about now?

Weinstein thinks that we are going through a bottoming process but it isn’t finished yet. He is still bearish, long term, but thinks that we may have hit a low short term. If the market can close above 9,800 he expects a rally. If it closes below 7,800 he expects it go even lower:

Moving Averages
A few readers asked me about the difference between 150 and 200 day moving averages. Weinstein mentions in the interview that he uses the 50 and 200 day moving averages, with the first for short term trading. There really isn’t a magical number. A long term moving average should represent the long term trend. Since there are approximately 200 trading days in a year, it makes sense to follow the 200 day moving average. But anything close to that level is fine as long as you stick to it.

Basing Sectors
If you are familiar with the stage analysis that Weinstein applies, he thinks that “select regional banks”, airlines and a few healthcare stocks are in stage 1 or basing. That doesn’t make them automatic buys, yet. They have to finish basing and break above with a volume burst. The financial sector has gotten clobered but the regional banks are different than the investment banks like Goldman Sachs (GS) and JP Morgan (JPM).

Worldwide Bear Market
Stan also mentions that this is a global bear market with stock markets across the world being mauled. I would go beyond that and say this is beyond a bear market like the one we saw in 1970 because everything is under forced liquidation, gold, oil, commodities, bonds, REITs, etc.

Watch the whole video for more details. And for up to the minute links to videos and articles like this, watch news.tradersnarrative.com

Stan Weinstein is a veteran technical analyst and author. Unlike many other ‘gurus’ he only wrote one book: Secrets for Profiting in Bull and Bear Markets. He’s been badgered since its publication in the 1980’s to write more but he always counters with ‘I’ve already said everything I could have said’. Which is very true. Take one novice, mix liberally with the Weinsteinian market approach and you’ve got yourself a trader who can go long and short, identify market tops and bottoms and manage their risk intelligently.

Since he wrote his classic book, Weinstein went on to author a retail newsletter called the ‘Professional Tape Reader’. He has since discontinued it and now Weinstein dedicates his considerable expertise and experience to publish an institutional service called the ‘Global Trend Alert’ (here’s a sample from 2005 (PDF)). Only problem is that it goes for $40,000 a year!

So, what to do if you aren’t a hedge fund and can’t soft-dollar it? or if you just don’t have $40K between the couch cushions? Well, for one, start by reading his book. Everything he does in the Global Trend Alert comes directly from the analysis he outlines there. Second, tune in to the Nightly Business Report on PBS. Weinstein is a guest on the Market Monitor segment of the show. Unfortunately, the rotation of guests on that segment is so you get to hear Stan’s take on the market only a few times a year. Read the transcript of his latest appearance in November 2006. Third, start analysing the market using the same tools. And go back and compare your understanding with his previous interviews in the archives.

OK so there isn’t exactly a way for you to get the $40,000 Global Trend Alert advisory service for free… but when you internalize Weinstein’s approach, you actually will have gained much more. You’ll be able to truly understand the why and how rather than having the end-product served up to you on a silver platter.