- Price trades sideways, oscillating above and below a flat 30-week EMA
- Follows a Stage 4 decline — the longer/deeper the decline, the bigger the potential base
- Volume typically contracts as disinterested sellers dry up
- 30w EMA slope: approximately zero (flat)
- Duration: weeks to months (bigger bases = bigger moves)
- Action: Watch and prepare. Build watchlists. No position yet.
- Price breaks above the 30w EMA on expanding volume (ideally 2x+ the 60-week average)
- 30w EMA turns upward and provides support on pullbacks
- RS line should be rising and ideally above its 40-week MA
- Power trend: Price stays above the 20-day EMA during strong advances
- Action: BUY on initial breakout or on pullbacks to rising 30w EMA
- Price stops making new highs, starts trading sideways
- Price breaks below the 10w EMA while still near the 30w EMA
- 30w EMA flattens from its prior upward slope
- Volume often expands on down weeks (distribution)
- RS line starts rolling over
- Action: SELL/reduce. Tighten stops. Do not initiate new longs.
- Price breaks below the 30w EMA on volume
- 30w EMA turns downward and acts as resistance on bounces
- RS line falling, below 40-week MA
- Each rally fails at or below the declining 30w EMA
- Action: AVOID or SHORT. Never buy Stage 4 stocks regardless of valuation.
The most powerful buy signal. All five criteria should be present:
- Price crosses above 30w EMA after extended Stage 1 base
- Volume on breakout week is 2x+ the 60-week volume average
- 30w EMA slope turns from flat to positive
- RS line rising (ideally already above 40w MA — RS leads price)
- Sector is in or entering Stage 2
- Price consolidates within Stage 2, then breaks out of the consolidation
- Volume expands on the breakout
- 30w EMA still rising
- Useful for adding to existing positions
- Price pulls back to the rising 30w EMA during Stage 2
- Volume contracts during the pullback (healthy)
- Bounce off 30w EMA on increasing volume
- Stop below the 30w EMA
- Price breaks below 10w EMA after extended Stage 2
- 30w EMA slope flattens
- Volume increases on down weeks
- RS line starts declining
- Price crosses below 30w EMA
- 30w EMA slope turns negative
- Heavy volume on breakdown week
- RS line falling, below 40w MA
| MA | Period | Role |
|---|---|---|
| 20-day EMA | Daily | Power trend gauge — price staying above = strong momentum |
| 10-week EMA | Weekly | Short-term trend — first to break in Stage 3 topping |
| 30-week EMA | Weekly | Primary stage determinant — the single most important line |
- Never buy a stock below a declining 30w EMA
- Never short a stock above a rising 30w EMA
- Pullbacks to rising 30w EMA in Stage 2 are buying opportunities
- Rallies to declining 30w EMA in Stage 4 are selling/shorting opportunities
- When 10w EMA crosses below 30w EMA = bearish death cross (Stage 4 confirmation)
- When 10w EMA crosses above 30w EMA = bullish golden cross (Stage 2 confirmation)
- Breakout volume: Should be 2x+ the 60-week volume EMA. Higher = more conviction.
- Pullback volume: Should contract. Heavy volume on pullbacks = distribution, not healthy.
- Climactic volume: Extremely high volume at lows can signal capitulation (Stage 4 → 1 transition).
- Volume dry-up: Very low volume in Stage 1 base signals sellers exhausted — setup for breakout.
RS line = Stock Price / S&P 500 Price
- RS above 40-week MA and rising: Outperforming the market — bullish
- RS below 40-week MA and falling: Underperforming — bearish
- RS leads price: RS often breaks out before the stock does. RS leading is a strong confirming signal.
- RS divergence: Stock making new highs but RS isn't = warning sign (Stage 3 precursor)
PPO = ((Price - 30w EMA) / 30w EMA) * 100
- PPO > 0: Price above 30w EMA (Stage 2 territory)
- PPO < 0: Price below 30w EMA (Stage 4 territory)
- PPO > 15-20%: Extended above 30w EMA — risk of mean reversion pullback
- PPO < -15-20%: Deeply oversold below 30w EMA — watch for Stage 1 base formation
- PPO at 0 = price exactly at 30w EMA (transition zone)
The biggest Stage 2 advances share these traits:
- Large Stage 1 base — months of basing after significant decline
- Strong sector — the stock's sector/industry is in or entering Stage 2
- Heavy breakout volume — 2x+ average, ideally 3-4x
- No overhead resistance — breaking to new highs or clearing major resistance
- RS leading — RS line broke out before the stock price
- Bull market tailwind — S&P 500 itself is in Stage 2
- Catalyst — earnings, sector rotation, or macro theme driving the move
- Breadth reaches oversold extremes (McClellan, % above 200dma)
- Leading sectors start forming Stage 1 bases
- First Stage 2 breakouts appear in leadership groups
- Volume climax / capitulation event
- Breakouts start failing (price gaps up then reverses)
- Fewer new Stage 2 breakouts across sectors
- Breadth reaches overbought extremes then diverges
- Rally duration extended (months without significant correction)
- Defensive sectors start outperforming (utilities, staples)
- Leading stocks break 10w EMA en masse
The 20-day EMA (20dema) is the "power trend" moving average. Its uses go beyond individual stock analysis:
- Power trend: Stocks making the largest moves trade above the 20dema. Price holding the 20dema during pullbacks = leading stock behavior.
- Exit signal: Breakdowns on heavy volume below the 20dema usually signal the end of an uptrend. Bearish reversal candles coinciding with 20dema breakdowns should not be ignored.
- Post-breakout support: Stage 2 breakouts should find support at the 20dema. A stock that breaks below the 20dema and stays below it during a market uptrend is simply not a leader.
- Count stocks above rising 20dema in a sector to gauge sector strength. When this count starts from a low level and dramatically increases over multiple weeks, a sector breakout is occurring.
- Declining count after a big run signals the end of the sector move — stocks breaking down below the 20dema after trending above it = distribution.
- This is an on-demand tool — do NOT auto-run or auto-display sector breadth tables during regular portfolio/ticker analysis. Use it only when explicitly requested via
--sector-scan.
| Depth | Scan Level | What it measures | When to use |
|---|---|---|---|
| 1 | 11 S&P 500 sector SPDRs | Market breadth — how many sectors in power trend | When explicitly asked for market breadth |
| 2 | Specific sector ETFs | Sector-level trend — is the sector ETF itself in gear | When checking a specific theme (e.g., GDX, SOIL, XLE) |
| 3 | Individual constituents | Constituent breadth — how many names are participating | When deep-diving into a focus list |
Breadth thresholds (when displayed):
- Strong (≥70%): Broad-based power trend — high probability environment for new longs
- Moderate (40-69%): Mixed participation — be selective
- Weak (20-39%): Narrow market — few sectors driving, caution on new longs
- Oversold (<20%): Deeply oversold — watch for reversal signals from leading sectors
When evaluating breakouts, breakdowns, or reversals, always check related instruments for confirmation or divergence:
A related stock, sector ETF, or commodity makes the same move at the same time. This increases conviction:
- GDX and gold both fail at resistance → confirms the failed breakout
- Multiple stocks in a sector breaking out simultaneously → strong sector move
- S&P 500 moving above 20dema at the same time sector leaders break out → maximum probability
A related instrument does the OPPOSITE. This can signal a turning point:
- SLV holds support while USD makes new highs → bullish divergence (SLV likely to lead higher when USD reverses)
- A leading stock fails to make new highs while the sector ETF does → leader exhaustion
Key principle: "The more of these favorable patterns we tie together, the more likely we are to win, and the bigger our gain will be." — Stan Weinstein
Price pushes above a significant resistance level, then reverses back below it. This can be the earliest indication of a potential top.
Criteria:
- Weekly price tries to push above resistance
- Stalls and reverses — bearish weekly reversal candle forms (close near week's lows)
- High volume on the reversal week (institutional "selling into strength")
- Check for coincident action in related stocks/sector
From failed breakouts can come fast moves lower. Index-level failed breakouts are especially significant — they preceded both the 2001-2003 and 2008-2009 bear markets.
Weekly price falls below a significant support level, then recovers back above it. This can be the earliest indication of a potential bottom.
Criteria:
- Price breaks below key support level
- Reverses back above support — bullish reversal candle forms
- High volume on the reversal (institutional "buying into weakness")
- Check for diverging action (e.g., related instrument NOT making new lows while this one does)
Volume typically contracts ("dries up") during Stage 1 basing as sellers exhaust. But a late expansion of volume while price remains range-bound is a powerful precursor signal:
- Buyers are overwhelming sellers at the same price level — absorption of supply
- The base is completing its right side — stock moving up to resistance
- "This late expansion of volume in Stage 1 can be a 'cheat code' to seeing a Stage 2 breakout occur shortly after."
Look for: volume increasing in the final 2-3 weeks of a Stage 1 base, especially while the stock approaches the upper boundary of its range. Combined with a sector emerging from oversold conditions, this dramatically increases breakout probability.
Resistance is defined as any price action above the current price over the last 2 years. This is specific and quantifiable:
- Near-term resistance (< 1 year ago): More significant — recent sellers remember their pain
- Far-term resistance (1-2 years ago): Less significant — diminishes with time
- Beyond 2 years: Should NOT be considered resistance for trading purposes
- No resistance: When price clears all activity from the last 2 years, there is no overhead supply. This is an ideal condition for big advances — "no resistance after the breakout."
Application: On Stage 2 breakouts, check if price has cleared all resistance from the past 2 years. Breakouts into clear air (no overhead supply) produce the biggest winners.
Stocks that gap up on big volume and complete a Stage 2 breakout are among the best buy signals. Both the gap and big volume indicate a major change of interest by institutions.
- If you catch it on the gap day: buy, but expect to sell into strength over the next 2-3 days
- If you miss the gap: wait for the first pullback (usually 1-3 weeks later)
- The first pullback is often the best entry point — better risk/reward than chasing
A healthy first pullback after a gap-up breakout should show:
- Price holds the 20dema — must not close below it
- Volume declines substantially compared to breakout volume, especially on down days
- Price does NOT re-enter the gap area — sellers cannot push price back into the gap
- If price fills the gap on heavy volume → the breakout has likely failed
This is the primary market breadth indicator for timing. Not available via yfinance — check on StockCharts.com directly.
Thresholds:
- Oversold in bull market: Bottoms near 30% — creates favorable conditions for new breakouts
- Oversold in bear market: Can go below 10% — deeper oversold before reversals
- Overbought: Sustained above 80% — not a sell signal by itself, but raises awareness of correction potential
Critical nuance: Breadth becoming oversold alone is NOT a buy signal. It creates favorable conditions — the actual buy signal comes from new Stage 2 breakouts appearing in strong sectors while breadth is oversold.
When the S&P 500 moves higher but breadth is declining (fewer stocks above their 50dma), the rally is increasingly narrow. This decreases odds of success for new longs because most stocks aren't participating, even though the index looks fine due to mega-cap weighting.
The S&P 500 typically has at least 2-3 5% corrections per year and a 10% correction most years.
Rule of thumb: After a 3-5 month rally, the market is generally due for a periodic correction. This is the time to:
- Raise cash — sell into strength, take partial profits
- Reduce position sizes — lighter heading into the correction
- Watch for topping signals — failed breakouts, 20dema breakdowns on volume, overbought breadth
Position sizing implication: Be position-sized heavier coming out of a correction (when fear is highest) and lighter heading into one (after a multi-month run when confidence is highest). This is counterintuitive but is the optimal strategy.
- Stop loss: Always below the 30w EMA for Stage 2 positions
- Tight stop: Below 10w EMA for momentum/trader positions
- Never average down in Stage 4
- Position sizing: Larger positions for textbook Stage 2 breakouts with all criteria met
- Sector confirmation: Individual stock Stage 2 in a Stage 4 sector = high risk