Specifically, every stock goes through four stages:

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 Specifically, every stock goes through four stages:

  • Stage 1: Consolidation (Basing). This is when a stock is stuck in neutral, and moving sideways, bouncing around a lot but ultimately going nowhere. It’s basically when a stock is neither good nor bad, but simply waiting for something good or bad to happen. 
  • Stage 2: Breakout (Advancing). This is when a stock starts to breakout from its basing phase and starts to move significantly higher. At this stage, the stock is usually benefitting from a lot of good news flows and investors are rushing into the stock hand over fist. 
  • Stage 3: Distribution (Topping). This is when a stock’s uptrend starts to end. The good news flow starts to ease. Investors who bought in Stage 1 and 2 start to take some profits off the table. But the stock isn’t falling, yet. New money is still supporting the stock in a consolidation pattern. 
  • Stage 4: Correction (Declining). This is when the topping pattern breaks, and everyone starts to sell. The stock starts to move significantly lower and in a rapid fashion. It’s the opposite of Stage 2.

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