In the previous article, I introduced that Minervini’s growth stock investment method, “SEPA trading method,” has five major elements.
Of these, this time, I will introduce trends in the SEPA trading method.
Stock prices seem to move randomly, reflecting the speculation of various investors and traders, but Minervini suggests that there are four trend stages in stock price movements.
To summarize the points, it is recommended to buy all stocks at the second trend stage (uptrend)!
First Trend Stage (Accumulation)
The first trend stage is a stage that can last for months or years, sometimes due to poor market conditions or due to poor fundamentals.
Minervini says it’s best not to buy stocks in this phase, even if the fundamentals are outstandingly good.
Features of the first trend stage
Stock prices do not show sustained movements up or down, but move flat
Up and down near the 200-day or 40-week moving average
Volume is low
It is possible to aim for the bottom price, but it is not fruitful just to get irritated
Even if you can buy at the bottom price, you have to wait for years before it rises significantly
Second Trend Stage (Uptrend)
The second trend stage tends to start suddenly without any big notice. You should buy stocks during this stage.
Features of the second trend stage
There is no big news at this point
Volume increases considerably and decreases to some extent on the squeeze
Stock prices have risen at least 25-30% (best 100-300%) from the 52-week low
The 200-day MA is on an uptrend with an upward trend (at least 1 month, preferably at least 4-5 months).
The 150-day moving average is above the 200-day moving average, and the stock price is above the two moving averages and the 50-day moving average.
The 50-day moving average is above the 150-day and 200-day moving averages, and the stock price is above the 50-day moving average.
Most beginners feel that the stock price is too high at this stage, but it's actually cheap.
The short-term moving average is above the long-term moving average (for example, the 50-day moving average is above the 150-day moving average).
The current stock price is at least 25% from the 52-week high (closer to the new high is better)
Relative strength (an indicator of how strong it is compared to the stock index) is 70 or higher, preferably 80 or 90
Highs and lows are rounded up in a staircase pattern
There are more rising weeks than falling weeks
If institutional funds are flowing in and the stock price is rising significantly, it is better to ride on that stock
Third Trend Stage (Distribution)
The third trend stage is with the majority of investors who know the stock because the stock has risen dramatically and became the headline of the article, while institutional investors are selling out at the same time. The wise investor who bought in is selling out at the last sign that the stock price is strong and is making a profit.
So, at this point, it’s too late to ride the wave of purchases and the risk is very high.
Features of the third trend stage
At this stage, institutional investors sell out. On the contrary, individual investors who got on the trend late start buying
Become a hot topic in the news
Stock price movement becomes unstable and volatility increases
Stock price breaks below the uptrend line
Stock price is below the 200-day moving average
The 200-day moving average turns sideways and moves up and down near the 200-day or 40-week moving average, which will eventually become a downtrend
Fourth Trend Stage (Downtrend)
The fourth trend stage is the stage where the company has announced that the rise in EPS will slow down and there will be a negative surprise.
Stocks are under selling pressure, as financial figures do not reach their earnings outlook, or profits are revised downwards before closing and downgraded by Wall Street analysts.
Selling in the fourth stage can last for a long time until the selling dies and there is no interest in the stock, and when the stock is ignored, it returns to the first stage.
Minervini says buying should definitely be avoided while the stock is in the fourth stage.
Features of the fourth trend stage
There is a negative surprise announcement from the company
Fire sale begins
Volume increases on days when stock prices fall, and volume decreases on days when stock prices rise
You should definitely avoid buying at this point, mistaking the plunge in stock prices as a buying opportunity.
Trends are important at this point, regardless of fundamentals
Stock price is below the 200-day moving average
200-day moving average is downtrend
Stocks are at or near a 52-week low
The stock price pattern is a step-by-step devaluation of highs and lows
Short-term moving averages are talked about in the news below the long-term moving averages
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