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Trading stocks information - General tactics and examples

Stock Stages and Cycles, Part 2

(Previous: Part 1)



There are four break points in chart analysis that help determine the best time to enter and exit a stock.

The Breakout - Three Criteria of Transitional Phase A

1. The initial breakout: the stock breaks above resistance. This represents an excellent entry point, but is difficult to ascertain and often riskier than other entry points, such as buying on a pullback. Shorterterm traders often ignore this entry in favor of a safer one.

2. The first pullback: the stock corrects or pulls back toward this initial breakout. This represents the safest entry point and a second chance to buy an uptrending stock.

3. The secondary breakout: the stock moves above its prior peak. This is a repeat of the initial breakout and is a poor entry point. Buying at this point means a trader is probably chasing the stock. For a safer entry, wait for another pullback. This entry point is best for the intermediate or longer-term trader. The first pullback has become a new level of support, and the secondary breakout becomes the new resistance.





Transitional Phase A (movement from Stage 1 to 2)

The breakout is Transitional Phase A. This phase ends Stage 1 and begins Stage 2. It is a difficult period to trade because of its volatility. In most cases, it moves past most traders and only becomes a viable play on a pullback.





Upward Trendline Break - Three Criteria of Transitional Phase B

1. The initial break: The stock does not create a higher high and breaks an upward trendline.

2. The first pullback: The stock moves back up toward the breakdown point but does not hit its resistance line.

3. The second break: The stock moves below its prior low and begins to create a new low, thus breaking its most recent support line. The stock has refused to break its resistance line, but does move down past its support line into new territory.





Transitional Phase B (movement from Stage 2 to Stage 3 or 4)

An upward trendline is broken to form Transitional Phase B. This transition ends Stage 2 and begins Stage 3. This period is often difficult to trade because of its volatility. In most cases, it moves past most traders and only becomes a viable play on the first pullback rally. It is important to be aware that a stock may go directly to Stage 4 without establishing Stage 3 first.





The Breakdown - Three Criteria of Transitional Phase C

1. The initial breakdown: The stock breaks below support. This represents an excellent entry shorting point. However, it might be difficult to catch this exact point. A trader should not be concerned if this entry point is missed because this is a riskier point than selling on a rally. Traders will often ignore this entry in favor of a safer entry point. Day traders are shorter-term traders.

2. The first rally: The stock corrects or rallies (rebounds) toward the initial breakdown point. This represents the safest entry point and a second chance to sell short a declining stock.

3. The secondary breakdown: The stock declines below its prior low. This is a repeat of the initial breakdown and is a poor entry point. Selling at this point means a trader is chasing the stock. For a safer entry wait for another rally. This entry point is best for the intermediate or longer-term trader. Please note that the first rally has now become a new level of resistance, and the secondary breakdown has become the new level of support.





Transitional Phase C (movement from Stage 3 to Stage 4)

A breakdown of a sideways movement makes up Transitional Phase C. Transitional Phase C ends Stage 3 and begins Stage 4. This period is often difficult to trade due to its volatility. In most cases it moves past most traders and only becomes a viable play on a #2 rally.





Downward Trendline Break - Three Criteria of Transitional Phase D

1. The initial break: A stock does not make a lower low and breaks a downward trendline.

2. The first pullback: A stock moves down toward the breakdown point, but does not hit its support line.

3. The secondary break: A stock moves above its prior high and begins to create a new high, thus breaking its most recent resistance line. The stock has refused to break its support line but does move past its resistance line into new territory.





Transitional Phase D (movement from Stage 4 to Stage 1 or 2

A downward trendline breaks to the upside to make a Transitional Phase D. Transitional Phase D ends Stage 4 and begins Stage 1 or 2. This period is often difficult to trade because of its volatility. In most cases it moves past most traders and only becomes a viable play on a #2 pullback. Note that the stock can go directly into Stage 2 without establishing Stage 1 first.


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