Understanding price movements in different stages
The above stock is a classic example of price movements in different stages. A stock moves in four stages and gives an early clue for phases. The stage-1 is a neglected phase, and the stock moves in sideways while oscillating around the 200-DMA. Often this basing stage takes place after the stock price declines during stage-4 for several months. Usually, the stock declines over 60 per cent from the top. The volume will relatively be very light as compared to stage-4. In a transition phase to stage-2, the stock price is above 150-DMA and 200-DMAs. The 150-DMA is above the 200-DMA while the latter has turned up. Series of higher highs & higher lows formations are likely to take place.
During the big up weeks, volume spikes will also be visible. The stage-2 is an advancing phase where accumulation happens. The stock price is in a clear uptrend - staircase. The short-term moving average is above the long-term averages (50-DMA above 150-DMA). Stage-3 is a topping phase or a distribution phase. The volatility increases and the stock moves higher. Initially, the price movement is much more erratic. There will usually be a major price break on an increased volume, which would result in the largest weekly decline since the beginning of the move along with huge volume. The stock may undercut its 200-DMA and price volatility around 200-DMA. This long-term average loses momentum, flattens out, and then rolls over into a downtrend. In the declining phase of stage-4, capitulation happens. A vast majority of price action is below the 200-DMA, it will be a definite downtrend. Stock price hits 52-week lows. The short-term moving average is below the long-term moving averages. Volume spikes would continue to be visible on big down days.
The following chart shows price movement in different stages of Rain Industries