At Master Trader, we teach traders to recognize two key factors when approaching the markets.

Let us start with what I consider to be the first basic truth of trading and investing: A Stock, ETF or Index is always in one of four stages.

All stocks, markets, or any tradable asset are always in one of these four stages, and the stages come in the same order, always.

The four stages also offer us a very specific way to treat the stock in that stage and every Advisory Swing or Options trade will be.

Stage One: Ambivalence

In stage one, the stock is in what I call a state of ambivalence. Nobody really cares much about the stock, and it trades back and forth in a range.

 There is usually very low volume, as there is little interest in the stock.

The range is typically small, as no one cares about this stock. Stage one always follows a period of selling, and often this selling can be enough to turn off the bulls from trying to buy any more.

They are wounded, hurt, out of money, and no longer interested. Other bulls may be watching and may soon want to buy, but at the moment, no one is interested, as this stock is weak, and no one knows how far it may fall.

There are many failed breakout and breakdown attempts, as neither bulls nor bears can find follow-through anymore. Breakouts always fail because traders holding the stock long on the way down sell into rallies, trying to recoup their money.

After enough time, many of these sellers exit or give up, and are no longer selling on rallies.

Suddenly, instead of a rally being slapped down, it holds. Bulls notice there are very few bears left, attracting the attention of other bulls, and a snowball effect develops.

When selling comes, it is just profit-taking from the new bulls, and the stock doesn’t fall as low as it did before. This transition leads to Stage Two.