Stage Investing Course With Recent Indian Examples (using TradingView charting app)

This article provides an in-depth guide to stage investing, a strategy designed to help investors identify optimal entry and exit points for stocks, particularly those with significant growth potential. The method focuses on analyzing weekly charts using specific technical indicators on TradingView, emphasizing patience and discipline over quick trades. It introduces the concept of a "moving bus" in the market, where the goal is to enter a stock when it’s already gaining momentum, much like catching a bus that’s about to depart, rather than waiting for one that may never leave. The core of stage investing is based on Richard Wyckoff's market cycle, dividing a stock's journey into four stages: accumulation (Stage 1), markup (Stage 2), distribution (Stage 3), and markdown (Stage 4). The strategy primarily advocates for entering stocks in Stage 2, which represents the period of strong upward movement, and exiting in Stage 4, when the stock is declining. This approach means "buying high and selling high," challenging the traditional "buy low, sell high" philosophy, as it prioritizes confirmed momentum over perceived undervaluation, which might lead to prolonged stagnation.

Basic Chart Settings on TradingView

To implement stage investing, specific settings are required on the TradingView platform. The primary indicators include the MA Ribbon (Moving Average Ribbon) and Simple Volume. For the MA Ribbon, set up three Exponential Moving Averages (EMAs) with periods of 9, 20, and 40 days. The speaker emphasizes using EMAs over Simple Moving Averages (SMAs) because EMAs are faster, reacting more quickly to recent price changes. These moving averages should be applied to weekly charts exclusively, as daily or monthly charts will automatically adjust the moving average periods (e.g., 9-day becomes 9-week for a weekly chart). Weekly charts provide a broader, more reliable view of stock movements, reducing noise from daily fluctuations. The Simple Volume indicator is used to gauge trading activity, with green bars indicating days where the stock closed higher and red bars indicating days where it closed lower, while the bar size reflects volume magnitude. Candlestick charts are preferred for their visual representation of price movements. Crucially, all analysis based on these settings should be performed only at the week's end (Friday closing, Saturday, or Sunday), as intra-week movements can be misleading. "No magic happens below the 40-week moving average" is a key guiding principle, meaning stocks trading below this average are generally not considered for investment under this strategy.

The Moving Bus Philosophy and Stage Investing Setup

The "moving bus" analogy highlights the core philosophy of stage investing: entering a stock when it is already in motion, rather than waiting for it at a standstill. This avoids the opportunity cost of capital tied up in stagnant assets. The speaker draws a parallel to catching a bus at a station: investors want to board a bus that is imminently departing, signaled by "drivers" (market trend), "conductors" (sector performance), and "whistles" (volume spikes). A well-defined setup, much like checking these indicators before boarding a bus, is crucial for disciplined investing. This setup helps avoid FOMO (Fear Of Missing Out) and ensures that investments are made based on clear rules, not sudden urges or external tips. The speaker strongly discourages relying on social media or news for investment decisions, advocating for a systematic approach. The ideal setup combines fundamental and technical analysis, often termed "techno-funda." While fundamental analysis involves understanding a company's intrinsic value and business cycle, technical analysis, as taught in this course, provides timing for entry and exit. The strategy is best suited for medium to long-term investors (minimum six months), as weekly charts reflect movements over this timeframe. Clearly defined entry and exit rules are essential to this setup.

Understanding the Four Stages of Stock Price Movement

Stage investing divides a stock's price journey into four distinct phases, based on Richard Wyckoff's market cycle. The primary goal is to enter a stock in Stage 2 and exit in Stage 4. This challenges conventional wisdom by embracing a "buy high, sell high" approach, meaning investors should be willing to buy a stock at a higher price if it fits their established setup, instead of missing out due to a perceived increase in price.

Stage 1: Accumulation (Basing)

Stage 1 is characterized by a stock moving sideways after a significant decline (at least 25-30% from its top) or undergoing a prolonged period of time correction (several years within a narrow price range). This forms a "base," where ownership transfers from "weak hands" (frustrated or impatient investors) to "strong hands" (value buyers and institutions). The longer the horizontal base, the better the potential for a strong upward movement. During Stage 1, the price typically oscillates above and below the 40-week moving average. A critical indicator for the start of Stage 1 is when the stock stops making new lows, signaling that accumulation may be underway. While a stock in Stage 1 might seem attractive due to its low price, investors should refrain from taking a position until it transitions to Stage 2, as it can remain in Stage 1 for years, tying up capital.

Stage 2: Markup (Breakout)

Stage 2 is the ideal entry point. It begins when the stock breaks out of its horizontal base and starts a sustained upward journey, consistently trading above the 40-week moving average. However, simply crossing the 40-week MA is not sufficient; multiple confirmations are needed to avoid false breakouts. A sudden, sharp upward movement is often a red flag, as ideal Stage 2 breakouts are preceded by a long, well-formed base. Market situation, sector strength, and strong trading volume are crucial for successful Stage 2 breakouts. Furthermore, the slope of the 40-week moving average should be trending upwards, indicating a healthy momentum. The presence of fewer "left-side resistances" (previous price levels where the stock encountered significant selling pressure) is also a strong positive. Relative strength, where the stock outperforms its sector and the broader market, is another key factor. Finally, a clear market trigger (e.g., sector tailwinds, product mix changes, management changes, regulatory shifts, or re-rating) and the absence of corporate governance issues are essential for a sustainable Stage 2 move. Ideally, at the time of breakout, the 9-week EMA should be above the 20-week EMA, and the 20-week EMA should be above the 40-week EMA, indicating a strong trend alignment.

Stage 3: Distribution (Topping Out)

Stage 3 is a transition phase where the stock's upward momentum slows, and it starts moving sideways. The 40-week moving average tends to flatten. This stage can either be a consolidation phase before another upward move (acting like Stage 1 but at a higher price level) or, more commonly, a distribution phase where large investors gradually exit their positions. Stage 3 is precarious, a "double-edged sword," as it can precede either a further rally or a significant decline. It's crucial for investors to monitor for signs of distribution, such as unusual volume patterns or repeated failures to break new highs. If the stock breaks down from its trading range within Stage 3, it often signals a transition to Stage 4.

Stage 4: Markdown (Decline)

Stage 4 is a period of sustained price decline, where the stock consistently trades below the 40-week moving average. All shorter-term moving averages (9-week and 20-week) also begin to move downwards, and their slopes turn negative. This is the optimal time to exit the stock if not already out. The speaker emphasizes that a stock breaking the 40-week moving average for two consecutive weeks should be a clear exit signal, regardless of perceived future potential, especially if fundamental analysis is not a core part of the investor's strategy. This stage is characterized by "free fall" or "Niagara Fall"-like declines, and attempts to catch "falling knives" (buying into heavily depreciated stocks) are highly risky and generally discouraged unless one is a pure value investor with deep fundamental understanding.

Riding and Exiting a Stage 2 Stock

Once a stock has entered Stage 2, the goal is to ride its upward momentum and exit effectively before it enters Stage 4. The decision to exit should also occur at the weekend, not during intra-week market hours, to avoid emotional, reactive decisions. The key is to constantly monitor which moving average (9-week, 20-week, or 40-week) the stock is consistently taking support on during its upward journey.

If the stock consistently breaks below its most recent support moving average for two or three consecutive weeks, it's a strong signal to exit. For instance, if a stock was consistently supported by the 9-week EMA and then closes below it for two consecutive weeks, an exit is warranted. The 40-week EMA serves as the ultimate "worst-case scenario" exit point; if a stock breaks below the 40-week EMA for two consecutive weeks, it's a mandatory exit, even if it means realizing a loss from the peak. The speaker also notes that when a smaller moving average crosses below a larger one (e.g., 9-week EMA crossing below 20-week EMA), it is a dangerous sign, indicating weakening momentum. While no system is perfect, disciplined adherence to these exit rules helps preserve capital and avoids significant drawdowns. For extremely long-term investors (those comfortable with significant drawdowns), these rules can be applied to monthly charts, with the 40-month moving average serving as an even more critical long-term exit indicator.

Factors Leading to Stage 2 Failures

Several factors can lead to a Stage 2 breakout failing to sustain its upward momentum. These include:

Overall Market Weakness: Even a promising Stage 2 stock may struggle if the broader market is in a downtrend or sideways movement. Bull markets provide tailwinds that accelerate stock movements, while bear markets or choppy sideways markets can lead to frequent breakout failures.
Negative Sectoral Trends: A stock's performance is heavily influenced by its sector. If the sector is not in a bull run or is facing headwinds, an individual stock within that sector, even with a Stage 2 breakout, may not achieve significant returns.
Lack of Trading Volume: Breakouts without substantial corresponding volume are prone to failure. High volume confirms strong institutional buying interest, which is necessary to sustain an upward trend.
Absence of a Clear Trigger: A stock needs a fundamental catalyst to fuel a sustained Stage 2 rally. Without a compelling story—such as new product launches, management changes, regulatory tailwinds, or a significant shift in business fundamentals—the upward movement may be short-lived.
Corporate Governance Issues: Companies with a history of corporate governance problems, unethical practices, or fraud are unlikely to attract institutional investment, which is crucial for sustained Stage 2 momentum. Such stocks might show temporary operator-driven moves but typically do not maintain long-term uptrends.
Choppy Price Action: Stocks that frequently oscillate above and below the 40-week moving average, or exhibit sudden, sharp price spikes followed by quick declines, are often indicating instability. These "choppy" stocks are difficult to ride and are generally best avoided for stage investing. Long bases, especially at all-time highs, tend to revisit test previous levels, and abrupt surges followed by swift retreats are indicative of unsustainability.

Takeaways

Chart Setup: Use TradingView with 9, 20, and 40-day Exponential Moving Averages (EMAs) for the MA Ribbon, along with Simple Volume. Analyze only on weekly candlestick charts, specifically after the Friday close.
"No Magic Below 40-Week MA": A fundamental rule is to avoid stocks trading below their 40-week Moving Average, as they are unlikely to show sustained upward movement.
Stage 2 Entry: The ideal entry point is when a stock enters Stage 2, breaking out of a long-term horizontal base (Stage 1). This breakout must be accompanied by high volume, a strong upward slope of the 40-week MA, and good market/sector conditions.
Exit Strategy: Exit a stock if it consistently (two consecutive weeks) closes below the moving average it was previously taking support on (9-week, 20-week, or 40-week). The 40-week MA is the last line of defense for exiting.
Confirmations and Triggers: Successful Stage 2 breakouts require multiple confirmations: favorable overall market trends, strong sector performance, increasing volume, ascending 40-week MA slope, relative strength against the market/sector leaders, and a clear fundamental trigger, while avoiding companies with corporate governance issues.