A well-known method of market-trend analysis for stocks was popularized by Stan Weinsein in his best-selling book, "How To Profit in Bull and Bear Markets". It depicts four distinct stages of evolution a stock or market index repeatedly cycles through and what it means to the investor.

Stage One of the cycle is price action trading sideways or flat for weeks, months or even years while running along a 200 DMA. Essentially, it is a forgotten stock that traders and investors have ignored. Likewise, it has hit and formed a price bottom that further selling cannot push lower. It's not ready for us to buy yet but certainly time to pay attention.

Stage Two is the start of trading opportunity. The stock now shows signs of life as its 200 DMA turns up while prices break above and away from this level on strong volume.

Markets beginning Stage Two action are those with most potential upside, with one caveat. It is very common for Stage-two markets to break away on rising volume only to return near the 200 DMA while testing support. A quick bounce from there often portends an advance to new recent price highs ahead.

Should traders always wait to see if this retest develops? Not necessarily, for many other sharp rallies will be missed. When entering plays right near Stage Two breakouts, traders should maintain close stops to exit false rallies and look to reenter soon.

Stage Two stocks are those just being discovered by Wall Street and small investors in turn. These are the ones soon to be the next stalwarts in the marketplace.

Stage Three starts to appear after the stock has rallied far from it's base of Stage Two. The 200 DMA will have risen during the advance in reflection but now threatens to flatten out as price action stalls or begins to fail near recent highs.

Curiously, Stage Three develops right at the pinnacle of hype and excitement for this stock. It's a media darling and favorite of investors and traders alike. Remember contrarian sentiment? If everyone has already bought in, who is left to push prices higher?

Stage Three most often includes volatile price swings and dips below the 200 DMA as buying strength tires and a struggle between bulls and bears ensues. This is clear warning to protect profits and consider exiting open trades

Stage Four is a culmination of the complete cycle. Adverse market, sector or individual news causes all the buyers to rush for the exit at once when selling ensues. Prices stagger or plunge as the 200 DMA turns down and prices trade below it.

The recent media darling is now a broken ship trying to remain afloat. Traders who made money from Stages Two through Three refuse to accept the party's over and continue to buy each dip as another soon drops below that. More money is commonly lost on the way down in Stage Four by small traders buying too late than was made on its way up as they entered near the top.

This process does not always progress in order. A stock can easily reach Stage Three, pause to consolidate and move higher from there. Still, this pattern repeats often enough for us to be aware of on any given play.

As always, let's review some examples:

(Daily chart, PLT)

PLT formed a nice base above its 200 DMA for some time before rising swiftly on strong volume. Traders who waited for a retest of support are still waiting as prices are up almost 100%.

Still plenty of potential upside to this play as it rests on the bottom of a rising channel support.

(Daily chart, BA)

Another example is BA. Not exactly a momentum-players favorite, Boeing formed a base that could not be taken lower. A clear pop into Stage Two saw this mega-cap issue appreciate 50%.

(Daily Chart, COF)

Capital One is in the midst of a clear Stage Two move. Prices broke away in late May and retested support in late June/early July. Cautious stop usage allowed exit and reentry to catch the real move up.

Is it over at 50+% gains? Not likely. Recent volume is still strong and string of white candles shows bulls are now taking this market higher.

(Daily Chart, T)

Time to hang up on AT&T for awhile. This stock is mired in a Stage Four decline and attempting to form a bottom. We need to see signs of that 200 DMA turning up as prices break above on strong volume before it becomes a viable target again.

(Daily chart, MO)

Phillip Morris has languished for awhile but has been smokin' lately. The 200 DMA has turned from decline to slight rise as prices moved on huge volume. Still in danger of support retest, this play could be headed straight up soon.

Being able to identify which development stage a specific stock or index is in allows investors and traders to form a short or long-term game plan when targeting trades.

Striving to enter within late Stage One to mid Stage Two should be the goal of all serious traders to maximize success regardless of overall market direction.