Market Stage Analysis | Stage 3 and 4- Run before it crashes!
Hello everyone, has you encountered this before:
Had a nice gain, but regret for not selling at the high, and see the gain is wiped out or turned into loss. Or entered the stock because of the hype, but then, it just crashed whenever we bought it.
If there is a simple method for us to identify the top is coming, so we can protect our gain, or least, not going to be trapped at the top, are you interested to know it?
In this video, I will sharing stage analysis on phase 3 and phase 4- on how we can identify a top of a bull-trend. I will be using some recent examples in this video.
Please watch the video version as it is a lot more illsutrative and easier to understand. Please also subscribe my channel if you find it insightful to motivate me!
Let me pull out the chart to illustrate the four stages of a major cycle again:
In my last video I have talked about stage 1 and stage 2, on the base forming and advance bull run. If you have not watched it yet, please click the link at the top right corner to get the full picture.
There is a statement saying: All good things must come to an end.
Stage 3 is also called “The top area”. This happens when the stock at the stage 2, or the advance stage starts to lose its momentum and trend sideways. Here, the buyers and sellers are at equilibrium, where the buying and selling force are almost the same. At this stage, it is like a mirror image to the stage 1.
To identify stage 3, we can use weekly MA30. First, the MA30 will lose its upward slope and start to flatten out. When the stock is consolidating at the top, the stock is now tiptoe below and above the MA30. If the volume is heavy here, it is a warning signal the top may be formed. I will use some examples later. When the stock break below the MA30, it will enter stage 4 and we can anticipate a choppy movement.
Similar to the stage 1, since phase 3 is a potential top, shall we sell our stocks? Either cut loss or profit take?
The answer is yes and no. First, stage 3 may be break out on the up-side again, and start another stage 2 without going through stage 4 and stage 1. Thus, money management is important. One of the best ways is to sell half and hold half of the original position, then, we will be able to benefit from the upward movement of the new stage 2. At the same time, we place stop loss for the remaining half slightly below the support, which is below the MA30. If it hits, we get out of the positions before the crash happens.
Stage 4 is the declining phase. This is where the disaster phase to most of the investors, and wipe out a lot of gain or even the capital of investors.
This is a period when the stock price is fatigue and facing pressures of fearful sellers. It will first break below MA30, then MA30 acts as a strong resistance. Take note that, while in my previous video I mentioned that we need a strong volume to support the breakout before entering an advance stage 2, a downside break into stage 4 does not need such a huge increase in volume to be considered valid. Just imagine if we cycle uphill, which needs a lot of energy, VS it is a lot easier if we cycle downhill.
In stage 4, we should never buy stock when move into stage 4. For short term or mid-term positions, time to sell them, either cut loss or profit take. For long term positions, do some protections such as hedging with put options. For some traders, it is time to short the stock to get more profits!
Although the market is moving in cycle, after stage 4, stage 1 and 2 will be coming, if the stock is gaining back the strength or with super fundamental. However, at stage 4, mental challenge is huge. It absolutely not easy to just see our hard-earned money or profit go down the drain. Many investors and traders hold many stage 4 stocks, think they will be coming back, but, the time can be months or even a few years. They lose patience and quit the market.
Ok, now let us look for some examples on how stage analysis can help us identify a top to profit take or cut loss.
The recent crash of $Invesco QQQ Trust (QQQ.US)$ (please watch the video for the full illustration):
On 17Jan2022, the weekly candle closed below MA30. The MA30 was also flattening. This is a suggestion that the market was topping. Thereafter, the market crashed and went into the bear market- stage 4. MA30 has become a strong resistance. Now, the price is testing on the MA30 again. The recent rally does not have a convincing volume. Also note that the current down-trend is still prevailing and MA30 is still sloping down. I anticipate the price will need more time to cross above the MA30 and a retracement is coming, Let’s see the extent of the next retracement will be going. As long as it does not break below the previous low at 269, it is a good news as the base could be forming. When the stock crossed above MA30 and MA30 is flattening, we will be in stage 1 and we shall get our cash ready for the next bull-run when stage 2 starts.
On 17Jan2022, the weekly candle closed below MA30. The MA30 was also flattening. This is a suggestion that the market was topping. Thereafter, the market crashed and went into the bear market- stage 4. MA30 has become a strong resistance. Now, the price is testing on the MA30 again. The recent rally does not have a convincing volume. Also note that the current down-trend is still prevailing and MA30 is still sloping down. I anticipate the price will need more time to cross above the MA30 and a retracement is coming, Let’s see the extent of the next retracement will be going. As long as it does not break below the previous low at 269, it is a good news as the base could be forming. When the stock crossed above MA30 and MA30 is flattening, we will be in stage 1 and we shall get our cash ready for the next bull-run when stage 2 starts.
If we look on the $SPDR S&P 500 ETF (SPY.US)$ , a very similar pattern is observed too (please watch the video for full illustration):
On 17Jan2022, the candle closed below MA30. The key different is MA30 was flat instead of sloping down until Apr2022. It is now going to test the MA30 too.
Next, look on the speculative growth stock, such as $ARK Innovation ETF (ARKK.US)$ . (please watch the video for full illustration)
Speculative growth stocks had nice run after the covid-19 crashed. However, when the stock first closed below weekly MA30 on 22Mar2021, it was a warning signal that the stock bull run may be over. Then, the stock consolidated for almost 8 months, a typical stage 3 pattern. During this period, MA30 was flattening, and most of the time, the price was below MA30. Thereafter, stage 4 kicks in and the stock crashed later.
Take note that if we bought the share at the early stage 2, and sold at the top, the gain will be almost 240%. If we sold at the price where it closed below MA30, the gain reduced to 130%, but it is still a nice gain for a one year profit right? If we hold the stock till today, the gain is only around 3-5%. Before that, it is a loss! From a gain of 240% to a net loss, definitely it won’t feel good.
My last example will be oil stock (Please watch the video for full illustration).
If we take $Energy Select Sector SPDR Fund (XLE.US)$ as an example, early stage 2 was around Nov 2022. Note on the 21Mar2021 where ARKK closed below MA30, XLE is in a nice stage 2 advanced run! Thus, stage analysis can also help us to transfer our money to the leading stock. If we move the money from ARKK (stage 3) to XLE (stage 2) stock, instead of suffering a huge loss later, we will be able to rip off another 90% gain of the oil stock surge.
By the way, in my opinion, the commodity bull run is over, which I will talk more about it in the next video. We shall look for the next leader now.
Please revise my previous video on stage 1 and 2, then combing with stage 3 and stage 4 video here, it would definitely provide some new insights on how to view the market or the individual stock.
That is all for today. Thank you and see you in the next video.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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learn investing in my YouTube channel at "JM investment journal"
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Echophi : So glad to see your point of view, thanks for sharing!
MACKGforEver : Looking forward to your next sharing~
JackieRose : As of today, I'm your fan! Keep it up bro!
Alexle0 : Do you think the situation you describe is suitable for SIGA?
JM investor OP Echophi : you are welcome!
JM investor OP MACKGforEver :
JM investor OP MACKGforEver : thank you! hopefully it provides some new insights to you!
JM investor OP JackieRose : thank you for your support
let's profit from the market together!
JM investor OP Alexle0 : it is now at stage two advance run. the first entry was 9.87. the second one is 14.84
when a stock at stage two, we should not short sell the stock.
no sign of stage three yet
101590763 : which stage is STI index ? it breaks up from Weekly Ma30.
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