1812 Brewing Company Inc (KEGS)

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Weinstein Analysis

http://www.sharehunter.net/WeinsteinAnalysis.htm

sharehunterStan Weinstein’s great contribution to understanding the volatility of share prices and to the important aspect of the timing of a buy or sell is his discovery and illustration of the life cycle of a share. He calls this ‘Stage Analysis’.

For example, if a stock trades between a high price and a low price for many weeks or months (or even years) it has ‘support’ at the low end and ‘resistance’ at the top end. As long as the stock continues to trade within this range then the buying and the selling pressures are roughly equal. That is why the stock remains stuck in the ‘tram-lines’ price range.

Eventually, either the buying (positive force) or the selling (negative force) will simply run out of energy. Once that happens the stock will either break above resistance or it will fall below support.
A break above resistance is usually accompanied by a ‘spike’ increase in volume and is usually followed by a rapid increase in price. It is not so much that an increase in buying has set in that makes the price start to rise; more usually it is simply that the sellers have run out of shares to sell. With the sellers no longer prominent the buyers are able to take over and the price runs up.
This is the best ‘buy’ point as it is usually the most profitable because it happens at the start of a long term ‘bull’ run.

The reverse is where the buyers are outweighed by the sellers and the price of the stock breaks below the bottom of the range. Here, usually, is the ideal point at which to ‘short’ the stock; certainly, the worst time to buy the stock as the fall is often sharp and can be painfully steep.

Weinstein found these price movements to be common to all stocks and he has identified four distinct phases in the life cycle of a stock, what he calls ‘Stage Analysis’.
His four Stages are –

Stage 1 - Accumulation/Stock Basing

Stage 2 - Uptrend/Rising Prices

Stage 3 - Distribution/Topping out

Stage 4 - Downtrend/Declining Prices

Each of these four Stages is characterised by a distinct pattern caused by the fundamental market forces of supply and demand. In Stages 1 and 3 buyers and sellers are roughly equal. In Stage 2 buyers have the upper hand and in Stage 4 selling is the strongest force.

As an investor you do not want to own a stock that is being sold off (Stage 4); nor do you want to buy a stock that is topping out (Stage 3). Understanding the life cycle of a stock shows you when it is best to buy the stock, when it is advisable to leave it alone and when you should sell it.
Stage 1 - Accumulation/Basing Phase

The stock tends to trade in a narrow range and appears to be ‘dead money’ to the average investor. This phase usually happens after a long decline or a lengthy advance. It can last for weeks, months or, sometimes, years. Generally, the longer the basing phase lasts the greater is the eventual breakout.
The forces of supply and demand are more or less in balance; there is no big buying excitement nor are there any waves of selling either. During this time the average investor will often sell out – either because of fear that the price will fall further or out of impatience at the lack of any rise. The general view is that the stock is going ‘nowhere’.

A ‘Stage 1’ trading range defines the base for future price action. Stocks that are basing bounce within a zone of a high and low price. Sellers often wait for the stock to get to the top of its range before they sell. In so doing they create the price area of ‘resistance’ – a price that the stock cannot seem to get through. When it reaches this level of resistance the price repeatedly falls back (because it is being sold off). The more often it does this the greater is the resistance. The Stage 1 Basing phase lasts as long as the resistance level holds and the stock remains stuck in its trading range.

Experience shows that the longer this stage continues the longer and greater will be the eventual Stage 2 Uptrend phase.
Stage 2 – Uptrend/Rising Prices

If the buyers (the ‘smart-money’ ones) continue to accumulate shares the sellers will get fewer and fewer. At this point the ‘resistance’ gets taken out as the price moves above its trading range ceiling. The ‘bulls’ get the upper hand with the stock, not because there are suddenly more buyers, but simply because the sellers are disappearing.
Quite often at this time the ‘fundamentals’ of the stock are viewed as poor and most analysts will be negative on the stock and any stockbroker may try to talk a client out of buying the stock – even though it is the very best time to buy!

As a buyer you are likely to be a lot better off by following the smart-money buyers (whose footprints will show up in the Stage Analysis technical chart of the stock) than by following the opinions of fundament analysts and stockbrokers.
As demand for the stock increases and outpaces the supply institutions and insiders will begin to compete to buy the stock. Their view of the stock’s fundamentals begins to change and they take a more positive view of it and, instead of just buying on the dips, will now buy into the rising price.

On the technical chart a ‘Stage 2’ advance is evidenced by a rising 30-week moving average (MA) with the (rising) price having risen up through the MA and remaining above it.

As the Advance continues the word that the fundamentals of the stock look positive gets louder and better known or, sometimes, a development of the company becomes common knowledge. As this happens the average investor and the general public become increasingly interested in the stock and begin to buy as well. Stockbroker analysts and newspaper tipsters begin to put the stock on their recommended buys lists. And so the price rises and rises.
Stage 3 – Distribution/Topping Out

Eventually, the share price gets ahead of itself and its advance stops. This can be weeks, months or even years later. It may be that the insiders view is that the valuation of the share is too high or perhaps the prospects for the company’s expansion no longer appear so rosy. Whatever the reason, there is a point at which the ‘smart money’ decides that it is time to start taking profits.
To the outside world the view of the company’s prospects still appear good and so there is no shortage of willing buyers. Such buyers have seen the price of the stock rise and rise and they see no reason why it should not continue to rise. They are encouraged by continuing strong reports on the company’s prospects from stockbrokers analysts, newspapers etc.

But the smart money, the insiders, the market traders, know better. They start selling into the rallies, gently, so as not to cause any collapse of the share price. The result is that the share price begins to flatten and to move sideways (bouncing off support and resistance levels again). It trades in a range (just like in the basing phase) but with greater volatility and price swings.
In this phase the ‘smart money’ is distributing shares instead of accumulating them.

On the Stage Analysis chart this Stage 3 phase is characterised by a sideways, wavy, 30-week moving average with the share price criss-crossing it, sometimes quite sharply.

Stage 3 lasts as long as the selling and buying pressure remain roughly equal. Once the buyers fall away the stock will break down below its trading range and will begin its liquidation phase.
Stage 4 – Share Liquidation/Downtrend

While a stock is being sold-off after a long price advance it is the in-the-know traders (the ‘smart-money’) who are selling into the rallies and the late-arrivals (the ‘average investors’) who are buying on the dips. Once the number of late-arrival buyers drops off, sellers outweigh buyers and so they then no longer wait for rallies before unloading their holdings of the share and sell ‘at best’. And so the price starts to decline faster.

At the beginning of a Stage4, as the price begins its decent, the average investor remains convinced that it is nothing but a temporary correction and that the price will start to rise again. The good news about the company and/or its business fundamentals remain good and the stock is still considered as a ‘buy’ or at least a ‘hold’ by most stock brokers analysts.
Buyers at this point (mistakenly) believe that the stock is now cheap and a ‘good buy’ and they become convinced that the stock has bottomed out, thinking that the price will return to its earlier highs.

It is a fact that the greater the Stage 2 price rise the longer the stock will remain popular during the beginning of its Stage 4 decline.
The sad truth is that the late buyers of the stock in Stages 3 and 4 become the sucker bag-holders for the smart-money sellers of the stock.
And it is those same smart-money traders who become buyers of the stock once those same bag-holders become totally disillusioned and sell out at the very bottom of the price cycle…just as a new uptrend is beginning.

A Stage 4 decline starts with the average investor full of hope….followed by holding in disbelief….then selling out in stressed-out panic at or very near to the final low.
On the Stage Analysis technical chart this is often very obvious as it shows up as a large volume spike, way above the average volume of the preceding months and years!

It is a common misconception that the end of a big decline and the start of a recovery in prices is when the big institutions decide that the market is cheap and start to buy.
In reality, it is not that way at all, indeed many institutions are themselves bag-holders through inertia.
No, stock market declines end when there is no more selling i.e. when the last bag-holder has sold out in panic and desperation; when all those who bought in hope of price rises finally lose hope.

On the chart the Stage 4 Decline is characterised by a falling 30-week moving average and with the intermittent highs and lows all occurring underneath the moving average. It is not until the price rises and breaks up to close above the moving average that the Stage 4 decline can be said to be at an end.
With no sellers left the stock price holds its ground and starts to move sideways …and so a new cycle, starting with Stage 1 Accumulation/Basing…begins.

The most profitable time to buy into a stock is at the end of a Stage 1 Accumulation phase and the start of a Stage 2 Uptrend phase. This is the time to buy in low, along with the clever money, and then to sell high along with those same ‘canny’ traders who know so much more than the vast majority of ordinary investors.

Having this knowledge (supplied to you by ShareHunterSelect) and putting it to use in the market with the added bonus of information on when to sell to take your profits is worth more than buying any number of trading systems or trading on “fundamentals”.