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peak, often crossing its 200-day moving average and the moving average begins to show an upward curve. Finally at stage four, the stock begins to decline dropping below its moving averages, and the moving averages begin to curve down. The drop could continue until the stock reaches a stable price, essentially a new stage one for the stock. And the cycle would then repeat itself. The periods where stocks may go through these stages vary from days to months and not all stocks exhibit this pattern. But those stocks that follow these stages could place the alert investor in an advantageous position if she can recognize the stages and the initial signs of the stages. At least theoretically speaking.

Support Level - Support levels are theoretical prices that a stock seems reluctant to drop below. The support prices are usually equal to or less than the current stock price, although theoretically they could be above the current price as well. Let's look an example. Suppose a stock currently trading at $50 begins to drop, but every time it hits approximately $45 it bounces right back. If this condition occurs several times it could indicate that there are enough buyers that would pay $45 for the stock and sellers are reluctant to sell below $45. Thus the $45 price becomes a support level for the stock. Support levels are usually marked with high volumes right around the support price. The higher the volume, the stronger the support level. Why? The high volume around the support level indicates that there are many buyers for that price and those buyers would obviously be reluctant to sell their stock at a loss unless they are forced to due to other conditions, such as bad news from the company.

To loosely relate this to the stage analysis, many times the support level of a stock corresponds to its stage one where its price does not drop below a certain value. Now suppose the stock, having built a support level at $45, begins to move higher, peaking at $55, then dropping to $50 several times but bouncing right back again. It could …