Always be consistent.
Those three words make up the last of five commandments from Stan Weinstein's seminal technical analysis book, Secrets for Profiting in Bull and Bear Markets. While the other four commandments are actually warnings that begin with "never", number five is more of a trading philosophy. Unfortunately, it's also the easiest one to forget.
Case in point, a trade I recently made involving Newmont Mining Corp. (NEM).
According to Mr. Weinstein's stage analysis, stocks are always in one of four stages. As the above chart illustrates, stage 1 involves a basing stage, where the stock is moving sideways at the tail end of a downtrend. Stage 2 is where buyers take control and send the stock into an uptrend. In stage 3, the stock tops out and signals a trend reversal. Stage 4 involves the establishment of a downtrend, the end of which starts the cycle all over again.
When I first looked at NEM, it appeared to be a textbook case of a stage 1 stock preparing to move into stage 2. It had been basing since December 2013, trading between approximately $22 and $26. I watched it for weeks as the bullish signals slowly emerged. The stock found support just below $25 while the RSI and MACD turned positive. The 50- and 200-day moving averages converged, forming a golden cross at the beginning of August – a sign that buyers had taken control. Finally, the stock broke resistance at $26.50, suggesting that it had some room to run. I hit the "buy" button and sat back, confident that Mr. Weinstein's system would see me to profitability.
It didn't turn out that way.
As it happened, the excitement of finding what appeared to be a great trade caused me to ignore an important aspect of stage analysis: volume. Without a torrent of money pouring in, any advance a stock makes is bound to be short-lived, and Mr. Weinstein specifically warns his readers to wait for significant, sustained volume before buying.
I should have listened.
I bought NEM on Aug. 12 after nine consecutive days of upward price movement, and sellers took over the next day. Since then the stage 2 pattern has begun to break down, with the stock falling below the 50-day moving average and forming support at around $25.25. It's not officially a bust yet, but had I waited for the volume to pick up I wouldn't be looking at a –6.23 per cent loss.
Always be consistent. Easier said than done.
Jody White is an editor for Report on Business