Stage 2 Investing - Stock Market Wizard by Mark Minervini

7 May 2017

 

 

 

 

"Newton's first law states that an object in motion continues in motion...An analogous property characterises the stock market: a Trend in force tends to remain in force until something occurs to change it"

 

 

 

 

 

 

 

 

Stage 1 - The neglect phase: CONSOLIDATION

 

Characteristics:

  • During stage 1, the stock price will move in a sideways fashion with a lack of any sustained price movement up or down

  • The stock price will oscillate around its 200-day moving average. During that oscillation, it lacks any real trend (upward or downward)

  • Often this basing stage takes place after the stock price has declined during stage 4 for several months or more

  • Volume will generally contract and be relatively light compared with the previous volume during the stage 4 decline

 

"You should avoid buying during stage 1 no matter how tempting it may be; even if the company's fundamentals look appealing"

 

"My goal is not to buy at the lowest or cheapest price but at the "right" price, just as the stock is ready to move significantly higher. Trying to pick a bottom is unnecessary and a waste of time...it's important to concentrate on stocks that move quickly after you buy them"

 

"Most amateur would think the stock is too high and wish they had bought it when it was lower, using hindsight as a guide. That's why most amateurs don't make big money in stocks"

 

Transition from Stage 1 to Stage 2

 

"a proper stage 2 will show significant Volume as the stock is in strong demand on big up days and up weeks, and volume will be relatively light during pullbacks"

 

Criteria:

  • The stock price is above both the 150-day and the 200-day moving average

  • The 150-day MA is above the 200-day

  • The 200-day MA has turned UP

  • A series of higher Highs and higher Lows has occurred

  • Large Up weeks on Volume spikes are contrasted by Low-volume pullbacks

  • There are more Up weeks on volume than Down weeks on volume 

 

Stage 2 - The advancing phase: ACCUMULATION

 

"...every superperformance stock made its big gain while in stage 2 of its price cycle"

 

Characteristics:

  • The stock price is above its 200-day MA

  • The 200-day MA itself is in an UPTREND

  • The 150-day MA is above the 200-day MA

  • The stock price is in a clear UPTREND, defined by higher Highs and higher Lows in a STAIRCASE pattern

  • Short-term moving averages are above long-term moving averages

  • Volume spikes on big up days and up weeks are contrasted by volume contractions during normal price pullbacks

  • There are more Up days and Up weeks on above-average volume than down days and down weeks on above-average volume

 

Stage 3 - The topping phase: DISTRIBUTION

 

Characteristics:

  • Volatility increases, with the stock moving back and forth in wider, looser swings.

  • There is usually a major price break in the stock on an increase in volume 

  • The stock may undercut its 200-day MA. Price volatility around 200-day MA line is common

  • The 200-day MA will lose upside momentum, flatten out, and then roll over into a downtrend

 

Stage 4 - The declining phase: CAPITULATION

 

Characteristics:

  • The vast majority of the price action is below the 200-day MA

  • The 200-day MA is now in a definite downtrend

  • The stock price is near or hitting 52-week new lows

  • The stock price pattern is characterised as a series of lower Lows and lower Highs, STAIR-STEPPING downward

  • Short-term MAs are below long-term MAs

  • Volume spikes on big Down days and big Down weeks are contrasted by low-volume rallies

  • There are more Down days and weeks on above-average volume than Up days and Up weeks in above-average volume

 

"When I am screening for superperformance stocks, my initial filter is rooted in strict qualifying criteria that are based purely on a stock's technical action...Simply put, no matter how good a company looks fundamentally, certain technical standards must be met for it to qualify as a buy candidate...I'm not interested in being the first one to the party, but I do want to make sure there's a party going on."

 

 

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