Tuesday, August 20, 2024

Mastering Approach to Swing Trading: Decoding the Specific Entry and Exit Point Analysis Method

Mastering Approach to Swing Trading


In the dynamic and often intricate world of stock trading, the name Mark Minervini stands out with considerable authority and respect. A legendary figure in the realm of finance, Minervini has carved out a niche for himself as a veritable guru of swing trading, a technique where traders seek to capture gains in a stock within a period of a few days to several weeks. His reputation is not merely built on success, but on a consistent, methodical approach that has been refined over decades of experience. Minervini's journey from an aspiring trader to a U.S. Investing Champion is a testament to his profound understanding of market dynamics and his unwavering dedication to his craft.

At the core of Minervini's success and teachings lies his Specific Entry Point Analysis (SEPA)., a methodology that has revolutionized the way traders approach the stock market. SEPA isn’t just a trading strategy; it's a comprehensive framework that synthesizes technical analysis, fundamental analysis, risk management, and psychology into a cohesive system. This approach focuses on identifying high-potential stocks before they make significant price moves, enabling traders to enter trades at the most opportune moments.

Central to the SEPA methodology is the belief that stock trading transcends merely selecting winning stocks, but doing so in a way that meticulously manages risk and maximizes potential rewards. It's about understanding the nuances of market trends, recognizing the right patterns, and acting on them with precision. Minervini’s methodology stands out for its emphasis on buying stocks that are not just rising, but are poised to continue their ascent, all while maintaining a strict risk management protocol to protect against losses.

The importance of SEPA in swing trading is truly paramount. In a domain where timing is everything, SEPA provides a structured approach to identifying the most opportune moments to enter and exit trades. This methodology empowers traders to make informed decisions, backed by a blend of technical indicators and a deep understanding of market psychology. Whether for seasoned traders or those new to the field, mastering SEPA is akin to gaining a new lens through which the stock market's movements can be deciphered more clearly and profitably.

Exploring the complexities of SEPA reveals that it is more than a mere collection of rules; it is a philosophy that shapes every choice in the volatile realm of swing trading. This approach stands as a tribute to Minervini's brilliance and serves as a guiding light for those steering through the constantly changing tides of the stock market.

 The Foundations of SEPA

 The Genesis of SEPA

The Specific Entry Point Analysis (SEPA) methodology was developed by Mark Minervini, a distinguished personality in the field of stock trading. This approach was born from Minervini's relentless pursuit of a reliable, systematic strategy for swing trading—a pursuit fuelled by years of rigorous study, trial, and real-world application. What sets SEPA apart is its genesis in both the triumphs and setbacks Minervini experienced in the early stages of his career. By dissecting each trade and meticulously analysing market patterns, he distilled a set of principles that would become the cornerstone of SEPA. This methodology isn't just a set of techniques; it's the crystallization of hard-earned wisdom and a deep understanding of market mechanics.

The core principles of SEPA are simplicity, convenience, and cost-effectiveness.

SEPA is based on four fundamental pillars: risk management, stock selection, market timing, and entry points. Each element is vital to the methodology's success.

 1. Risk Management: At the heart of SEPA is a stringent focus on minimizing risk. Minervini emphasizes that successful trading is less about the frequency of wins and more about the magnitude of those wins against losses. The SEPA approach advocates for a disciplined risk management strategy, where setting stop-loss limits and knowing when to exit a trade are as important as entering one.

2. Stock Selection: SEPA advocates for a meticulous selection process, emphasizing stocks with the highest potential for growth. This involves analysing companies with strong fundamentals—such as earnings growth, market leadership, and industry strength—and overlaying this with technical analysis to identify stocks poised for breakout.

3. Market Timing: Understanding the market's mood is vital in SEPA. It's not just about what to buy or sell, but when to do it. SEPA stresses the importance of aligning trades with the overall market direction and sentiment. This synchronization with market cycles is crucial for maximizing trade efficiency.

4. Entry Points: SEPA distinguishes itself with its focus on 'specific entry points.' The methodology prescribes entering a stock at a point where the probability of upward momentum is highest and before the majority of the move has occurred. This precision in timing entry points is what often differentiates successful trades from the rest.

The Essence of Risk-Reward Ratio

A fundamental element of SEPA is the focus on a favourable risk-reward ratio. Minervini advocates for a principle where the potential gain of a trade should substantially exceed the potential loss. This concept is not just about setting a high bar for potential profits; it's about ensuring that each trade is entered with a clear understanding of the potential loss and a plan to mitigate it. The risk-reward ratio is a crucial metric in SEPA, guiding traders to make decisions that align with their risk tolerance and trading goals.



 Understanding the SEPA Criteria

 The SEPA Framework for Stock Selection

 In the world of SEPA (Specific Entry Point Analysis), the process of selecting stocks is far from arbitrary. It is a methodical approach, relying on a combination of technical and fundamental analysis to identify stocks with the highest potential for growth. Mark Minervini, the architect of SEPA, has defined a clear set of criteria for stock selection, each playing a pivotal role in the decision-making process.

 Price Trend and Pattern Recognition

One of the keystones of SEPA is the focus on price trends and pattern recognition. This involves analysing historical price movements and chart patterns to predict future stock performance. Minervini emphasizes the importance of identifying stocks in a strong uptrend, characterized by higher highs and higher lows. He also looks for specific chart patterns that historically precede significant price increases, such as cup-and-handle or tight consolidation patterns. These patterns are indicative of a stock accumulating strength before a potential breakout.

 Volume Dynamics

Volume plays a critical role in validating the price movements of a stock. In SEPA, significant price moves accompanied by high volume are considered more credible and sustainable. High trading volume suggests a strong conviction in the stock's movement, whether it’s an upward surge or a downward trend. Minervini pays close attention to volume spikes, particularly when they coincide with breakout moments from established patterns, as these often signal the start of a major price move.

Relative Strength Compared to the Market

Relative strength is a key concept in SEPA, referring to a stock's performance in relation to the overall market or its specific sector. Stocks that outperform the market, especially during periods of general market weakness, are often prime candidates in SEPA analysis. This outperformance indicates inherent strength and investor confidence, suggesting that the stock may continue to thrive even in less favourable market conditions.

 Fundamental Criteria

While SEPA heavily incorporates technical analysis, it also places significant importance on a company's fundamentals. Criteria such as earnings growth, sales growth, return on equity, profit margins, and debt levels are carefully examined. Minervini looks for companies with strong, consistent earnings growth, robust sales figures, and solid financial health. These factors are crucial as they provide a sound basis for a stock's potential for long-term growth, beyond just technical indicators.

 The Synergy of Technical and Fundamental Analysis

The essence of SEPA lies in the harmonious integration of technical and fundamental analysis. While technical analysis helps in timing the market and identifying entry points, fundamental analysis offers a deeper insight into a company’s intrinsic value and growth potential. This dual approach enables traders to make well-rounded decisions, balancing immediate market signals with long-term company performance.

Minervini's SEPA method teaches that neither technical nor fundamental analysis should be used in isolation. By combining both, traders can filter out noise, focusing on stocks that not only show promising technical patterns but are also fundamentally strong. This comprehensive approach is what sets SEPA apart and has contributed to its effectiveness and popularity among traders.

 The SEPA Trading Process

Identifying Trading Opportunities with SEPA Criteria

 The first step in the SEPA trading process is the identification of potential trading opportunities. This involves a meticulous analysis of stocks through the lens of the SEPA criteria: price trends and patterns, volume dynamics, relative strength, and fundamental health. Traders using the SEPA methodology scan the market for stocks exhibiting the tell-tale signs of an impending price surge, such as a strong uptrend, breakout patterns, and high relative strength compared to the market. These indicators, combined with robust fundamental metrics like impressive earnings growth and solid financials, flag stocks as prime candidates for trading.

 Timing the Market: Understanding Cycles and Sentiment

SEPA is not just about finding the right stocks; it's equally about timing the market. This aspect involves understanding and interpreting market cycles and overall market sentiment. Minervini emphasizes the importance of aligning trades with the broader market direction. A bullish stock in a bearish market, or vice versa, might not perform as expected. Traders using SEPA stay attuned to market trends, economic indicators, and investor sentiment, using them as a backdrop against which individual stock performances are gauged. This sensitivity to the market's rhythm helps in making informed decisions about when to enter and exit trades.

 Entry Strategies: Determining the Right Entry Point

A critical component of the SEPA methodology is determining the precise entry point for a trade. This decision is based on a confluence of technical indicators, including the completion of a bullish chart pattern and a corresponding increase in trading volume. The ideal entry point is often just after a stock breaks out of a consolidation pattern, signalling the start of a potential uptrend. However, timing is key; entering too early or too late can significantly affect the trade's outcome. SEPA traders use a combination of real-time analysis and historical patterns to identify these specific entry points, seeking to maximize gains and minimize exposure to volatility.

 Setting Stop-Loss Orders and Managing Risk

Risk management is a cornerstone of the SEPA approach. Minervini advocates for setting strict stop-loss orders to protect against unforeseen market movements. A stop-loss order is an automatic sell order set at a certain price level, usually below the purchase price, to limit potential losses. Determining the stop-loss level involves assessing the stock's volatility and the trader's risk tolerance. This proactive approach to risk management ensures that losses are contained, and capital preservation is prioritized.

 Real-world Examples and Case Studies

 Analysing Successful SEPA Trades

 One of the best ways to understand the efficacy of the SEPA methodology is through the lens of real-world examples and case studies. Let's consider a few historical trades that were successful under the SEPA framework:

Case Study 1: The Tech Breakout  

A prominent example involves a technology stock that showcased a classic cup-and-handle pattern on its chart. The stock was also showing strong relative strength compared to the overall market and was backed by solid earnings growth. The entry point was identified just as the stock was breaking out of the pattern, coupled with a significant increase in volume. This trade was successful because it adhered to all the SEPA criteria: a strong technical pattern, high relative strength, sound fundamentals, and a clear entry point marked by increased volume.

Case Study 2: The Retail Surge 

Another instance involved a retail company that had been consolidating for several months but maintained a strong earnings record. When the stock eventually broke out of its consolidation range on high volume, it signalled a strong buy under the SEPA methodology. The trade capitalized on the combination of a bullish technical signal and robust fundamental performance.

Why Certain Trades Work and Others Don’t

In analysing these successful trades, it's evident that their success hinged on a strict adherence to the SEPA criteria. Conversely, trades that fail often do so because one or more of these criteria were overlooked or misinterpreted. For example, entering a trade solely based on a technical pattern without considering the stock's fundamental strength or the overall market sentiment can lead to unfavourable outcomes. Similarly, ignoring the importance of volume as a confirmation for a breakout can result in false signals.

 Lessons Learned from SEPA Case Studies

 Several key lessons emerge from these case studies:

1. The Importance of a Holistic Approach: Successful trades often result from a balanced consideration of both technical and fundamental factors. Relying too heavily on one aspect can lead to missed signals or misjudgements.

2. Timing and Precision Matter: Entry and exit points are crucial in the SEPA methodology. Even the right stock, if traded at the wrong time, can lead to suboptimal results.

3. Risk Management is Key: The trades that fare best under SEPA are those where risk management rules are strictly followed. This includes setting appropriate stop-loss levels and being willing to exit a trade when the initial analysis is no longer valid.

4. Market Context is Essential: Understanding the broader market environment is critical. A strong stock in a weak market, or vice versa, may not perform as expected.

 Common Challenges and Mistakes in SEPA

 Identifying Pitfalls and Misconceptions

 While the Specific Entry Point Analysis (SEPA) methodology offers a structured approach to swing trading, it is not without its challenges and common mistakes. Understanding these pitfalls is crucial for both novice and experienced traders aiming to effectively implement the SEPA strategy.

1. Overemphasis on Technical Analysis: One common mistake is focusing too heavily on technical indicators while neglecting fundamental analysis. While SEPA does involve meticulous chart and pattern analysis, disregarding a company’s fundamental health can lead to risky investments in stocks with weak financials or poor growth prospects.

2. Misinterpreting Volume Signals: Another challenge is correctly interpreting volume dynamics. Some traders might misread volume spikes or overlook the importance of volume in confirming breakout patterns, leading to false entries or exits.

3. Ignoring Market Context: Traders sometimes fail to consider the broader market sentiment or trend, which is critical in SEPA. A bullish stock in a bearish market might not perform as anticipated, and vice versa.

4. Poor Risk Management: Perhaps the most critical mistake is inadequate risk management. This includes setting inappropriate stop-loss orders or not adhering to them, resulting in larger than necessary losses.

 Strategies to Avoid These Mistakes

 To avoid these common mistakes, traders should adopt several strategies:

1. Balanced Analysis: Ensure a balanced approach that considers both technical and fundamental aspects of a stock. This means not just looking at chart patterns but also at a company's earnings, growth potential, and financial stability.

2. Thorough Volume Analysis: Pay close attention to volume patterns and learn to interpret them correctly. High volume should accompany significant price moves, especially during breakouts.

3. Market Awareness: Stay informed about overall market trends and sentiment. Aligning individual trades with the general market direction is crucial for the success of the SEPA methodology.

4. Disciplined Risk Management: Establish clear risk management rules, including strict stop-loss orders, and adhere to them rigorously. It's better to exit a losing trade early than to hope for a turnaround that may never come.

Tips for Beginners Adopting SEPA

 For beginners keen on adopting the SEPA approach, here are some tips:

1. Start with Education: Familiarize yourself thoroughly with the SEPA methodology. Understand its principles, strategies, and the rationale behind them.

2. Practice with Paper Trading: Before investing real money, practice with paper trading to get a feel for how SEPA works in real market conditions without financial risk.

3. Learn from Mistakes: Analyse every trade, successful or not, to understand what worked and what didn’t. Learning from mistakes is as important as celebrating successes.

4. Stay Disciplined: Discipline is key in trading. Stick to your analysis and don’t let emotions drive your trading decisions.

5. Seek Community and Resources: Engage with a community of SEPA traders and seek out educational resources to continuously improve your understanding and application of the methodology.

 Advanced SEPA Strategies

 Elevating SEPA for Experienced Traders

 For traders who have mastered the basics of Mark Minervini's Specific Entry Point Analysis (SEPA), there are advanced strategies and nuances that can be employed to further enhance trading performance. Experienced traders can delve deeper into the complexities of SEPA, fine-tuning their approach to align with their unique trading styles and goals.

 Adapting SEPA to Varying Market Conditions

1. Bull Markets: In a strong bull market, SEPA traders can look for stocks showing relative strength and breaking out from sound consolidation patterns. Here, the focus can be on aggressive growth stocks with higher potential for rapid gains.

2. Bear Markets: During bearish phases, SEPA strategies can be adjusted to focus on defensive stocks or sectors that tend to outperform the market. In such conditions, more stringent criteria for entry points and tighter stop-loss orders are advisable to manage the heightened risk.

3. Sideways Markets: In range-bound markets, traders might concentrate on stocks with strong fundamentals that are showing relative strength against the market, trading within well-defined channels. Here, buying at the lower channel and selling at the upper channel, or shorting at the upper channel and covering at the lower channel, can be effective.

 Integrating SEPA with Other Trading Tools and Methodologies

1. Combining with Quantitative Analysis: Experienced traders can combine SEPA with quantitative analysis tools, such as algorithmic trading systems, to identify potential trade setups more efficiently.

2. Using Options for Leverage and Hedging: Implementing options strategies alongside SEPA can provide leverage and hedging capabilities. For instance, buying calls on stocks that are breaking out or selling puts on stocks near support levels can enhance returns while managing risk.

3. Sector Rotation Strategies: Understanding and applying sector rotation strategies in conjunction with SEPA can be beneficial. This involves shifting investments among stock market sectors as the economy moves through different phases of the business cycle.

4. Incorporating Sentiment Analysis: Advanced traders can integrate market sentiment tools, such as social media analysis and news sentiment indicators, to gauge investor sentiment and potential market directions that might impact their SEPA strategies.

5. Risk Diversification Techniques: Implementing risk diversification techniques, such as spreading capital across various sectors and not over-concentrating in a single stock, can help manage overall portfolio risk.

6. Continuous Learning and Adaptation: Finally, it's crucial for seasoned traders to stay abreast of new market trends, economic developments, and trading technologies. This continuous learning and adaptation can lead to more refined and effective SEPA strategies.

SEPA in the Digital Age

Embracing Technology in SEPA Analysis

 In the rapidly evolving landscape of financial markets, technology plays an instrumental role in enhancing and refining trading strategies like Specific Entry Point Analysis (SEPA). The digital age has ushered in a host of tools and innovations that can significantly augment the SEPA methodology, making it more efficient, accurate, and adaptable.

 1. Trading Software and Platforms: Advanced trading platforms now offer a myriad of tools that align well with SEPA strategies. These include sophisticated charting tools for pattern recognition, real-time market data feeds, and automated alert systems for potential entry and exit points. Such platforms enable SEPA traders to monitor multiple stocks simultaneously and execute trades more swiftly.

2. Artificial Intelligence and Machine Learning: AI and machine learning are revolutionizing the way traders analyse the market. These technologies can process vast amounts of data – from price movements to economic indicators – at speeds and depths beyond human capability. For SEPA traders, this means more precise pattern recognition, enhanced predictive analytics, and better risk assessment models.

3. Algorithmic Trading: Algorithms can be designed to automatically identify stocks that meet the SEPA criteria, execute trades at optimal entry points, and manage risk with pre-set rules. This automation not only speeds up the trading process but also helps in maintaining discipline, a key aspect of the SEPA strategy.

Future Prospects of SEPA in Evolving Financial Markets

 As financial markets continue to evolve, the principles of SEPA remain relevant but may require adaptation to align with new market dynamics.

 1. Adapting to Market Volatility and Complexity: Financial markets are becoming increasingly volatile and complex. SEPA traders will need to continually refine their strategies to adapt to these changes, possibly by incorporating more real-time data analysis and adapting to shorter or more erratic market cycles.

2. Integration with Emerging Technologies: The integration of SEPA with emerging technologies like blockchain and decentralized finance (DeFi) platforms could open new opportunities. These technologies might offer more transparent and efficient market data, enhancing the accuracy of SEPA analysis.

3. Educational and Collaborative Tools: The proliferation of online trading communities and educational resources will make SEPA methodologies more accessible to a broader audience. Collaborative tools and platforms can facilitate knowledge sharing and collective analysis, benefiting traders at all levels.

4. Sustainability and Ethical Investing: As the trend towards sustainable and ethical investing grows, SEPA strategies might also evolve to include environmental, social, and governance (ESG) criteria in stock selection and analysis.

5. Globalization of Markets: The globalization of financial markets offers SEPA traders a broader canvas. Adapting SEPA to different regional markets and economic conditions will be crucial for traders looking to capitalize on global opportunities.

Synthesizing the SEPA Journey

 As we conclude this exploration of Mark Minervini's Specific Entry Point Analysis (SEPA), it's important to reflect on the key insights and lessons gleaned from this comprehensive methodology. SEPA, with its roots in meticulous analysis and disciplined execution, stands as a testament to the power of a well-structured approach in the realm of swing trading.

 Key Takeaways from the SEPA Methodology 

• The Four Pillars: We began by understanding the foundational elements of SEPA: risk management, stock selection, market timing, and precise entry points. These pillars form the bedrock of the SEPA approach, guiding traders through the complexities of market dynamics.

• Criteria for Stock Selection: Delving deeper, we examined the specific criteria SEPA employs for choosing stocks, including price trends, volume analysis, relative strength, and fundamental analysis. The synergy between technical and fundamental analysis emerged as a critical aspect of effective stock selection.

• The Trading Process: The SEPA trading process, encompassing opportunity identification, market timing, entry strategies, and risk management, was dissected to provide a roadmap for practical application.

• Learning from Real-world Cases: Through case studies and real-world examples, we observed SEPA in action, learning from both successes and failures to glean valuable insights into effective trading strategies.

• Navigating Challenges: Recognizing common pitfalls and challenges in SEPA helped us understand the importance of a balanced, disciplined approach, particularly for those new to the methodology.

• Advancing with SEPA: For the experienced trader, we explored advanced strategies and adaptations of SEPA in varying market conditions, emphasizing the role of continuous learning and adaptation.

 The Enduring Relevance of SEPA

SEPA's relevance in modern swing trading remains robust. Its principles of disciplined risk management, combined with a keen analysis of market trends and stock fundamentals, provide a timeless framework suitable for navigating the ever-changing financial markets. As markets evolve, the core tenets of SEPA continue to offer valuable guidance for traders seeking to maximize their trading potential. 

A Call to Continuous Learning and Application

The journey with SEPA doesn't end here. Whether you're a novice trader just starting out or an experienced market participant, the SEPA methodology offers a path for growth and refinement in your trading practices. The world of trading is dynamic and requires a commitment to continuous learning, adaptation, and disciplined application of proven strategies.

As you integrate SEPA into your trading toolbox, remember that the journey is as much about personal growth as it is about financial success. Embrace the lessons, celebrate the successes, and learn from the challenges. SEPA is more than just a strategy; it's a pathway to becoming a more astute, resilient, and successful trader. In Chapter 3, Mark introduces his winning system (SEPA). But first he explains his losing strategy from the 1980s.

When stocks were trading near their historical lows, I figured they had to be bargains. It wasn’t long before I realized that many of these stocks were low-priced for good reason and in most cases were on their way to lower lows. He also noticed that many stocks on the 52-week-high list went even higher.

Influences

Mark was influenced by Richard Love’s book Super-performance Stocks. Chapter 7 looked at what big winning stocks had in common. Love focused on stocks that went up 300% or more and covered the period between 1962 to 1976. Then in 1988, Mark read an article in the Financial Analyst Journal by Marc R. Reinganum called “Anatomy of a Stock Market Winner.” This study looked at stocks that went up 100% during the period from 1970 to 1983. Cross-referencing the two, Mark became convinced that this “reverse factor modelling” had merit, with two key lessons: 

1. There is a right time and a wrong time to buy stocks.

2. Super performance stocks are identifiable before their dramatic price increase.

Mark also cites “The Relative Strength Concept of Common Stock Price Forecasting” by Robert A. Levy. This helped him to focus on price strength. And he liked Edward S. Jensen’s “Stock Market Blueprints” for each type of stock (income, growth, cyclical growth, and dynamic growth). He also liked trend following rules. These include buying and selling of stocks when the 5-day MA crosses the 20-day MA. And William L. Jiler’s work on chart patterns was also influential.  The cup-and-handle patter popularized by William O’Neil was his favourite. His final influence was Jesse Livermore, and his lesser-known book “How to Trade in Stocks”.

 The leadership profile

When computers became cheap enough to have at home (late 1980s, kids), Mark worked all this information up into what he calls The Leadership Profile. 

This is a blueprint of what makes a super performance stock. Mark compares all stocks with this to see how well they match. See also:  Minervini 5 - Charts and Primary Bases Specific Entry Point Analysis (SEPA®). Once he knew what kind of stocks he was looking for, Mark focused on timing his entries and exits. He was looking for high-probability entries with good risk-reward ratios. When he had this worked out, the SEPA system was born. 

The system comprises five elements:

1. Trend - A price uptrend refers to the movement of a financial asset's price when the overall direction is upward, characterized by each successive peak and trough being higher than the ones found earlier in the trend. This pattern indicates a bullish sentiment among investors and suggests a continuous increase in the asset's value over time.

2. Fundamentals - Super-performance stocks, or super-performance phases in stocks, are propelled by improved earnings, increased revenue, and enhanced margins. This improvement usually starts before the super-performance phase but continues within it.

3. Catalyst - The major victors possess a catalyst that ignites institutional interest. This could be a drug approval, a new product or a big contract, or a new CEO. He cites Blackberry, Apple and Google as examples.

4. Entry points - Mark doesn't detail the methods for locating these, but he does assert that most high achievers possess at least one low-risk entry point.

5. Exit points - It's true that not every trade will be successful. So, you need a stop loss to force you out of losing positions in order to protect your account. You also need to identify the end of the super performance stage in order to sell at a profit. Mark doesn’t tell us how to do this here.

SEPA ranking process

Mark also provides an overview of his process:

Stocks must satisfy a Trend Template - A series of filters based on earnings, sales and margin growth, relative strength, and price volatility are then applied. 95% of trending stocks will fail the filters. Those that pass is matched against the Leadership Profile. This includes both fundamental and technical factors.

The final stage is a manual review, using the following characteristics: Reported earnings and sales. Earnings and sales surprise history. Earnings per share (EPS) growth and acceleration. Revenue growth and acceleration. Company-issued guidance. Revisions of analysts’ earnings estimates. Profit margins. Industry and market position. Potential catalysts (new products and services or industry- or company-specific developments). Performance compared with other stocks in same sector. Price and trading volume analysis

Liquidity risk

The process is designed to identify potential for: Future earnings and sales surprises and positive estimate revisions. Institutional volume support significant buying demand. Rapid price appreciation based on a supply/demand imbalance, lack of selling vs buying. This is all to find the “Probability Convergence” – the point with the lowest risk and the highest potential for reward. My goal is to purchase a stock and be at a profit immediately.

Super-performance traits

Mark ends the chapter with some of the common traits of super-performance stocks that he has identified: Decent earnings are usually already on the table. Most stocks had fundamental and technical outperformance before their biggest gains. Coming out of a bear market or correction. More than 90% of big winners began their surges here. During a bear market, only a handful of stocks tend to outperform. Less than 10 years into their stock-market listing. They could have been private companies for many years before their IPO. You mustn’t shy away from names you have never heard of. Most super performers are small to medium firms. Sometimes a large cap will super perform as a turnaround, or after a bear market, but Mark would take profits more quickly here. Look for smaller firms that are in their growth phase (accelerating earning and sales). They should already be profitable and have proven that their business model can scale.

Stock Screening

Mark uses stock screens, but he cautions against making them too complicated. You may inadvertently eliminate good candidates that meet all your criteria except for one. He likes to run several screens that are based on smaller lists of compatible criteria. So, there would be a screen for relative price strength and trend. And a separate fundamental screen based on earnings and sales. Some names will recur, while others will appear on only one list.

We’ll leave it there for today. We’ve covered three out of thirteen chapters. It’s a relatively long book for an investing manual, and I think it’s unlikely that we’ll cover it in our usual four articles. Five or six seem more likely at this stage, but we’ll see how it goes. This is a very American book, with a lot of emphasis on determination and self-belief. But what we’ve covered of the system so far seems reasonable. It reminds me of Weinstein’s Stage System, but with a layer of fundamental analysis added on top of the technical. I’ll be back in a few weeks with the next couple of chapters, which cover Value and Trend.



Recap the history

In 1988, Minervini developed his own investment strategy — Specific Entry Point Analysis (SEPA). SEPA is a highly disciplined stock trading method, referred to as a ‘surgical-precision trading strategy’. The method is based on the analysis of historically emerged ‘super-performance stocks’, encompassing both company fundamentals analysis and technical analysis of stocks. Its evaluation criteria include rigorous research, decades of application, and observable facts. SEPA focuses on identifying underpriced stocks to find the best low-risk/high-return entry points. With SEPA, stocks with great potential for significant gains can be accurately identified.

 The basic characteristics of star stocks can be divided into five categories, which form the foundation of the SEPA method: 

1. Trend Model, 

2. Fundamentals, 

3. Catalysts, 

4. Buying Timing (Entry Point), and 

5. Selling Timing (Exit Point).

The analysis process of SEPA is as follows: A stock must first satisfy the ‘Trend Model’ to become a SEPA candidate. Stocks that meet the Trend Model will be continually filtered based on their revenue, sales, profit growth, relative advantages, and price volatility. The remaining stocks will be carefully compared with the ‘Leadership Profile’, examining in detail whether they meet the fundamental and technical factors of historically super-performance stocks. The final step is manual analysis; filtered stocks will be examined one by one and then ranked according to related indicator characteristics.

The Minervini Trend Model

The Mark Minervini Trend Model is a significant reason for Minervini’s success in the stock market. It is a crucial step in the SEPA method. This is a very famous stock screening tool, and historically, all the star stocks selected for the Minervini stock pool have been generated from this tool.

Minervini has delineated four stages of stock price behaviour based on the actions of stock prices. By employing trend screening, he is able to identify stocks that are in the second stage of a confirmed upward trend with efficiency and precision. This trend model is what he calls his ‘inviolable standard.’ Any stock that does not meet this standard will not appear on his list.

 The Four Stages of Stock Price 

For a stock to be in the second stage of a confirmed upward trend, it must satisfy the eight criteria of the Minervini Trend Template. These criteria include the stock price being above both the 150-day and 200-day moving averages, the 150-day moving average being above the 200-day moving average, and the 50-day moving average being above both the 150-day and 200-day moving averages. Additionally, the stock price must be trading above the 50-day moving average, at least 30% above its 52-week low, within 25% of its 52-week high, have a relative strength score greater than 70, and the 200-day moving average line must be trending up for at least one month.

Below are the ‘inviolable standards’ of this trend model:

  • 1.       The current stock price is above the 150-day (30-week) and 200-day (40-week) moving averages.
  • 2.       The 150-day moving average is above the 200-day moving average.
  • 3.       The 200-day moving average has been on an upward trend for at least 120 days.
  • 4.       The 50-day moving average is above both the 150-day and 200-day moving averages.
  • 5.       The current stock price is above the 50-day moving average.
  • 6.       The current stock price is at least 30% higher than the 52-week low (the higher, the better).
  • 7.       The current stock price is within 25% of the 52-week high (the closer to the new high, the better).
  • 8.       The relative strength rating is no less than 70, ideally 80 or above.

The Minervini Trend Model has proven that over 95% of historical ‘big bull’ stocks have had tremendous gains during the second stage of a confirmed upward trend. This is not merely an opinion, but a conclusion based on facts. This conclusion can be traced back to the end of the 19th century and has stood the test of time. The trend is the investor’s friend; riding the wave and catching stocks in the second stage of a confirmed upward trend will lead to more brilliant investment performance.

 The understanding of trends in the Minervini Trend Model resonates remarkably with that in William J. O’Neil’s CAN SLIM rules. Additionally, the key metric of his trend model, the Relative Strength Rating, is exclusive to O'Neil. Investors who favour trend-based strategies may find this tool useful in pinpointing potential 'big bull' stocks.


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