Weinstein's Theory Of Relativity

This book is mainly for investors and traders. An investor holds a position for at least three months, while a trader trades two to three times a month. His method is helpful for swing and position traders but not necessarily for daytraders.

Weinstein's method requires a few simple indicators and tools to make the method work, including:

• 30-week moving average indicator
• Relative strength ranking indicator
• Volume indicator
• Trendline drawing tool

To find the right stocks:

1. Identify what stage the market is in. In Figure 1, Weinstein categorizes the stages of the market: uptrend, consolidation, downtrend, consolidation. Stages 1 and 3 are consolidation phases, while stages 2 and 4 are trending phases.

FIGURE 1: STAGES OF THE MARKET. Here you see the four stages of the market: consolidating, trending, consolidating, trending.

2. Search for the sector with strength. Compare the sector to the broader indexes such as Dow Jones Industrial Average or the Standard & Poor's 500. See Figure 2.

FIGURE 2: COMPARING SECTORS WITH INDEXES. Comparing a chart of the sector to that of the broader indexes will help visualize if a sector is strong or weak.

Once you find the sector that is showing strength (in a bull market) or weakness (in a bear market) relative to the index, the next step is to check the charts in that sector and find the strongest stock. Here are the steps you need to go through (see Figure 3):

FIGURE 3: FINDING THE STRONGEST STOCKS. Determining which stage of the typical cycle the stock is in, the direction it is moving, the relative strength, breakouts, and support/resistance levels will help you decide on whether you should place the trade.

• What stage are the individual stocks in? Are they in stage 1, 2, 3, or 4?
• The 30-week moving average is used to identify the stages, direction of the trend, and the setup criteria to take a position.
• The relative strength (RS) reading is used to sort out the strong stocks from the weak. Any stocks with an RS above zero qualify, but the higher the positive number, the stronger it is.
• Use trendlines to identify the breakout points.
• Resistance (for longs) or support (for shorts) is identified as possible obstructions to the trending movement of stocks. The weaker the resistance/support, the more likely the stock will make big moves without major problems.

Once you identify the best trading candidates, you should enter the trade on high volume at the trendline breakout. High volume at the breakout will determine if the stock has enough interest to continue higher. This is an important criterion when taking a position. With little or no volume, the breakout cannot be trusted. Once you do place a trade, remember that a stop-loss must be in place when you take your position. The stop-loss should be below the last correction low (see Figure 4).

FIGURE 4: PLACING THE TRADE. A breakout from a trendline accompanied with high volume is an ideal situation to place a long trade.

FIGURE 5: PLACING STOP-LOSSES. When you place the trade it is always a good idea to place a stop-loss. As the stock continues to move higher you should move your stop-loss so you can absorb as much profit as possible.

SUGGESTED READING
Schwager, Jack D. [1989]. Market Wizards: Interviews With Top Traders, Prentice Hall Trade.