Stage Analysis Breakout Quality Checklist
The following is a checklist to work through to determine the quality of the breakout and whether it meets the methods requirements. The starting point for Weinstein's method when looking to buy a stock is first to consider Stan's "Forest to the Trees" Approach:
Forest to the Trees Approach
"i. What's the trend of the market? If it's negative, you'll want to do very little if any buying, even if you see some stocks breaking out. Your probabilities of success are quite low when the market trend is going against you.
ii. Which few groups look the very best technically? The importance of this question can't be overemphasised since my studies have consistently shown that two equally bullish charts will perform far differently if one is from a bullish sector while the other breakout is in a bearish group. The favorable chart in the bullish group will often quickly advance 50 to 75 percent while the equally bullish chart in the bearish group may struggle to a 5 to 10 percent gain.
iii. Once you determine that the market trend is bullish and Group A acts the very best technically, the final step in the process is to zero in on the one or two best individual chart patterns in that sector."
Quote from page 75 of the book
Investor Method
If you are following the investor method, do the majority of your buying early in Stage 2. Ideally the Stage 2A breakout point and it's secondary pullback entry point, or the initial Stage 2 continuation breakout once you've accessed the quality of the Stage 2A phase.
Stage 2A Breakout quality checklist:
Weekly Chart
1. Price Action
a) is price above a flattening or rising 30 week moving average?
b) is the 10 week MA rising?
c) is price moving above the last significant swing high that formed above the 30 week MA?
d) was there a contraction in volatility prior to the breakout. i.e this could be seen through patterns such as the inverse head and shoulders or a cup and handle formation etc?
2. Volume
a) is volume at least two times the four week average by the end of the Stage 2A breakout week?
b) did volume contract significantly during the right hand part of the Stage 1 base on the down weeks
3. Relative Performance
a) is the relative performance of the stock versus the S&P 500 above the Zero Line (Relative Performance 52 week MA)?
b) is the relative performance zero line itself flattening or rising?
4. Support / Resistance
a) is there significant near term resistance? If you need help visualising it, then look at the weekly Ichimoku cloud for a visual aid.
Daily Chart
1. Price Action
a) is the 50 day MA above the 150 day MA?
b) is the 50 day MA rising?
c) did the price on the breakout day have a strong close. i.e. a close near the high of the day?
2. Volume
a) is volume at least three times the daily average volume on the breakout day?
Monthly Chart
1. Price Action
a) is price above the 30 month moving average?
b) is price breaking out to new 12 month highs?
2. Volume
a) is volume at least two times the four month average by the end of the month of the weekly Stage 2A breakout? For breakouts earlier in the month you'll need to judge whether this is likely based on the initial breakout volume. And you should always look at the monthly chart at the end of the breakout month to check it's met the requirement.
This is not an exhaustive checklist, but if a stock fulfills all of these criteria listed, then the probabilities of it being an A+ candidate are greatly increased. But that doesn't mean that you should discard stocks that don't meet all of the checklist as plenty are slow out of the gate and then become A+ stocks later in their Stage 2 advance on one of the continuation breakouts. So definitely keep an eye on those stocks too.
As you can see it's important to analyze a stock over multiple time frames beginning with the weekly chart, as it's the most important in Stage Analysis, and then working through the other time frames for the additional confirmation. And once you find a stock with A+ potential on it's own, then I'd suggest revisiting the sector/group analysis that you did initially and comparing the stock to it's peers. As if it's making a Stage 2A breakout, then you want to see similar behavior in the rest of the group, with ideally the stock you are considering being the leader of the group. i.e. first to move into Stage 2, while the rest of the group are close to doing the same, as we want to buy the leader, not the laggards.
Note that this is still a work in progress, so I will continue to make improvements over time. I hope it helps.
Trader Method
If you are following the Trader method, then do the majority of your buying on high quality continuation moves of a stock already in a strong Stage 2 advance that has shown A+ characteristics throughout the advance. Ideally it will have had a proper consolidation period of multiple months+ that occurs above a still strongly rising 30 week MA and will have shown a contraction in volatility and volume as the consolidation develops.
Stage 2 Continuation Breakout quality checklist:
Weekly Chart
1. Price Action
a) is price above a strongly rising 30 week moving average*?
b) is the 10 week MA rising*?
c) is price moving to new highs?
d) was there a contraction in volatility prior to the breakout. i.e this could be seen through patterns such as ascending triangle pattern or a cup and handle formation etc?
*In a longer consolidation base the 10 week MA can oscillate between up and down, and 30 week MA can get flat and will only just be turning higher again on the breakout week due to it's strength.
2. Volume
a) is volume at least two times the four week average by the end of the Stage 2 continuation breakout week?
b) did volume contract during the pullback on the down weeks?
b) did volume contract significantly during the right hand part of the consolidation base, especially on the down weeks, and get very quiet (below average volume) for a period prior to the breakout?
3. Relative Performance
a) is the relative performance of the stock versus the S&P 500 strongly above the Zero Line (Relative Performance 52 week MA)?
b) is the relative performance zero line itself rising?
4. Support / Resistance
a) is there significant near term resistance? If you need help visualising it, then look at the weekly Ichimoku cloud for a visual aid.
b) is the base significant enough in size to provide support should the price pullback to test the breakout level?
c) is the last significant swing low on the base close enough in order to provide a place for the trader stop loss to go with a suitable amount of risk/reward? If the continuation breakout was a gap up to new highs, then the stop loss can go below the intraday low of the gap day above the base.
Daily Chart
1. Price Action
a) is the 50 day MA above the 150 day MA?
b) are the 50 day MA and 150 day MA both rising?
c) did the price on the breakout day have a strong close. i.e. a close near the high of the day?
2. Volume
a) is volume at least three times the daily average volume on the breakout day?
Monthly Chart
1. Price Action
a) is price above the 30 month moving average?
b) is price breaking out to new multi year highs?
c) is price in Stage 2 on the monthly chart?
2. Volume
a) is monthly volume above average?
3. Support / Resistance
a) is there significant old resistance in view, that could come into play in the near future?
Again, this is not an exhaustive checklist and is still a work in progress, but if a stock fulfills all of these criteria listed, then it should increase the probabilities of a successful continuation breakout. But as before, you need to do the forest to the trees approach to make sure the market is healthy and that you are focusing on the strongest sectors, as with the Trader method it's even more important to be in tune with what the market is doing, as even the best looking setups will fail if the market is acting very negatively.
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Disclaimer: For educational purpose only. Not investment advice. Seek professional advice from a financial advisor before making any investing decisions.