SEPA Strategy Analysis

SEPA Strategy Analysis

Analyze stocks using Mark Minervini's SEPA (Specific Entry Point Analysis) framework — a complete system for identifying high-probability growth stock entries with strict risk management.

Core philosophy: Buy the right stock, in the right stage, at a precise entry point, with strict risk controls. Win rate is ~50-55% — profitability comes from asymmetric risk/reward (small losses, large gains), not from predicting direction.

This skill is for educational/analytical purposes only. It does not constitute investment advice. Never execute trades based solely on this analysis.

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Step 1: Gather Stock Data

Collect the following data for the stock. Use yfinance or any available market data tool.

Data needed	Purpose
Current price	Trend template check
50-day, 150-day, 200-day moving averages	MA alignment verification
52-week high and low	Price position check
200MA value from 1 month ago and 4-5 months ago	MA200 slope direction
20-day average volume + today's volume	Volume ratio analysis
Recent quarterly EPS (last 3-4 quarters)	EPS growth & acceleration
Annual EPS (last 3 years)	Long-term growth trend
Recent quarterly revenue (last 3-4 quarters)	Revenue growth check
Gross margin and net margin trend	Margin health
Institutional ownership changes (if available)	Smart money signal
RS rating or 12-month relative performance vs S&P 500	Relative strength
Price history for pattern recognition	VCP / chart pattern analysis

If certain data is unavailable, note it and proceed with what you have. Missing RS rating is a significant gap — flag it.

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Step 2: Stage Analysis — Identify the Current Stage

Every stock cycles through four stages. Read references/stage-analysis.md for full details.

Determine which stage the stock is in:

Stage	Characteristics	Action
Stage 1 — Basing	Price near 200MA, MA flat/declining, MAs tangled, low volume	Do nothing, wait
Stage 2 — Advancing	Making higher highs/lows, bullish MA alignment, volume on up days	Only stage to buy
Stage 3 — Topping	Wide swings at highs, frequent false breakouts, heavy volume without progress	Reduce, no new positions
Stage 4 — Declining	Below all MAs, bearish alignment, bounces are selling opportunities	Full cash, stay away

If the stock is NOT in Stage 2, stop here and tell the user. No further analysis needed.

Within Stage 2, count the base number (how many consolidation-then-breakout cycles have occurred):

• Base 1-2: Safest, most upside potential — full position
• Base 3-4: Still valid but reduce position size
• Base 5-6: Late stage — half position at most
• Base 7+: Avoid — likely transitioning to Stage 3

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Step 3: Trend Template — 8 Mandatory Conditions

All 8 conditions must be met simultaneously. If any fails, the stock does not qualify. Read references/trend-template.md for detailed explanations.

Present results as a checklist:

#	Condition	Status	Value
1	Price > 150MA and Price > 200MA	Pass/Fail	[actual values]
2	150MA > 200MA	Pass/Fail	[actual values]
3	200MA trending up for ≥1 month (ideally 4-5 months)	Pass/Fail	[slope data]
4	50MA > 150MA and 50MA > 200MA	Pass/Fail	[actual values]
5	Price > 50MA	Pass/Fail	[actual values]
6	Price ≥ 30% above 52-week low	Pass/Fail	[% above low]
7	Price within 25% of 52-week high	Pass/Fail	[% from high]
8	Relative Strength > 70th percentile (prefer 85-90+)	Pass/Fail/Unknown	[RS if available]

Memory aid: Conditions 1-5 = "MA staircase" (Price > 50MA > 150MA > 200MA, 200MA rising). Conditions 6-7 = "Price position" (far from low, near high). Condition 8 = "Relative strength" (market leader).

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Step 4: Fundamental Check

Strong fundamentals separate real leaders from momentum-only stocks. Read references/fundamentals.md for thresholds and rating criteria.

Check these in order of importance:

1. Quarterly EPS growth ≥ 20% (prefer 25-50%+). Below 20% = disqualify.
2. EPS acceleration: Current quarter growth > prior quarter growth. Deceleration (even with positive growth) is a warning.
3. Annual EPS growth ≥ 25% for each of the past 3 years.
4. Revenue growth ≥ 15% annually, ≥ 20-25% quarterly preferred. If EPS grows but revenue doesn't, the growth is likely from cost-cutting (unsustainable).
5. Margin trend: Gross and net margins stable or expanding = healthy. Contracting margins even with EPS growth = red flag.
6. Institutional ownership increasing: Smart money accumulating = fuel for Stage 2 move.
7. Catalyst: New product, FDA approval, major contract, market expansion, etc. Stocks with catalysts can run 50-100%+; without, typically 15-25%.

Rate fundamentals: A (EPS >30%, positive, revenue growing) / B (15-30%) / C (0-15%) / D (negative — skip).

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Step 5: Pattern Recognition

Identify which consolidation pattern is forming (if any). Read references/patterns.md for detailed identification rules for each pattern.

VCP (Volatility Contraction Pattern) — The Core Pattern

The signature SEPA pattern. Look for these 7 characteristics:

1. Stock must be in Stage 2 uptrend (prerequisite)
2. Pullback depths decrease in sequence (e.g., 20% → 12% → 6% → 3%). Minimum 3 contractions, 4-5 ideal.
3. Volume shrinks with each contraction. Final contraction shows "Volume Dry-Up" (VDU) — multi-week low volume.
4. Higher lows — each pullback bottom is higher than the previous one.
5. Clear pivot point — the consolidation range high = resistance level to break.
6. RS > 70 (preferably 85-90+)
7. Market in bull or neutral environment

Other Valid Patterns

Pattern	Depth	Duration	Key Feature
Cup with Handle	Cup 12-35%, handle ≤12%	7-65 weeks	U-shaped base + small handle
Flat Base	≤ 15%	5-10 weeks	Tight range near prior highs
Bull Flag	≤ 50% of flagpole	1-5 weeks	Sharp advance + tight drift down
High Tight Flag	≤ 25% after 100%+ advance	1-4 weeks	Rarest but most powerful

All patterns share the same entry rule: breakout above the pivot point with volume ≥ 1.5x the 20-day average.

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Step 6: Entry Point Analysis

Read references/entry-rules.md for detailed entry mechanics, true vs false breakout identification, and the pocket pivot alternative.

Primary Entry: Pivot Point Breakout

• Pivot point = the highest price in the consolidation range. This is the supply/demand inflection point.
• Buy zone = pivot price to +5% above pivot. This is the only valid entry window.
• Beyond +5%: Do NOT chase. Wait for the next setup.
• Breakout volume: Must be ≥ 1.5x the 20-day average volume (≥ 2x is strong confirmation).
• Earnings proximity: Avoid entering within 2 weeks of an earnings report.

Breakout Quality Check

Signal	True Breakout	False Breakout
Volume	≥ 1.5x average, big spike	Below average, weak
Close	Near the day's high	Falls back below pivot
Follow-through	Continues higher next day	Drops back into range
Context	VDU preceded breakout	No volume dry-up before

Risk/Reward Validation

Before entering, verify:

• Stop loss distance: Entry price to stop ≤ 7-8%
• Reward/risk ratio: Target profit / stop distance ≥ 2:1 (prefer 3:1)
• If ratio < 2:1, the entry is too risky — skip it.

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Step 7: Position Sizing & Stop Loss Plan

Read references/position-sizing.md for the full formula, examples, stop loss evolution, and pyramiding rules.

Position Size Formula

Shares = (Account Value × Risk Per Trade %) ÷ (Entry Price − Stop Price)

Example: $100,000 account, 1% risk, buy at $50, stop at $46.50:

• Max loss = $100,000 × 1% = $1,000
• Stop distance = $50 − $46.50 = $3.50
• Shares = $1,000 ÷ $3.50 = 285 shares ($14,250 = 14.25% of account)

Stop Loss Evolution (3 phases)

Phase	Trigger	Action
Phase 1: Initial	At entry	Hard stop at entry price −7-8%. Non-negotiable.
Phase 2: Breakeven	Stock reaches +8%	Sell half, move stop to entry price (breakeven). Trade can no longer lose money.
Phase 3: Trailing	Stock reaches +15%	Sell another 25%, trail remaining stop along 20MA. Close below 20MA = exit all.

Iron rules: Stop losses only move UP, never down. Never average down on a losing position. After 3-4 consecutive losses, reduce risk per trade to 0.5%.

Pyramiding (Adding to Winners)

Only add to winning positions, with decreasing size: 50% initial → 30% at +8% → 20% at next base breakout. Never add to losers.

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Step 8: Market Environment Check

Read references/market-environment.md for detailed criteria.

The market environment is the master switch for position sizing:

Environment	Criteria	Risk Per Trade	Max Positions
Bull	S&P 500/Nasdaq above 200MA, breadth expanding, new highs > new lows	1-2%	6-8
Choppy	Sideways indices, frequent failed breakouts	0.5-1%	2-3
Bear	Indices below 200MA, >50% of stocks below 200MA	0% (no new positions)	0 (all cash)

Even the best setups fail in bear markets. Holding cash during bear markets IS a winning strategy — preserving capital for the next bull run.

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Step 9: Respond to the User

Present a structured analysis report with these sections:

Report Structure

1. Stock & Stage: Ticker, current price, identified stage, base count if Stage 2
2. Trend Template Scorecard: 8-condition checklist with pass/fail and actual values
3. Fundamental Grade: A/B/C/D with EPS growth, acceleration status, revenue, margins
4. Pattern Identified: Which pattern (VCP, cup-handle, flat base, flag, HTF, or none), with key measurements (contraction depths, volume behavior)
5. Entry Assessment:
   • If a valid pattern exists: pivot price, buy zone, breakout volume requirement
   • If not yet formed: what to watch for
   • If already extended: "This has moved beyond the buy zone — wait for the next consolidation"
6. Position Sizing: Using the formula, show exact shares, stop price, first target, second target, and reward/risk ratio. Ask the user for their account size and risk tolerance if not provided.
7. Market Environment: Current assessment and how it affects sizing
8. Overall Verdict: One of:
   • Strong Buy Setup — all criteria met, actionable now
   • Watch List — promising but pattern not yet complete or one condition marginal
   • Pass — fails trend template, wrong stage, or poor fundamentals

Always end with the disclaimer that this is educational analysis, not investment advice.

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Reference Files

• references/stage-analysis.md — Four-stage theory, transition signals, base counting
• references/trend-template.md — Detailed 8-condition explanations and memory aids
• references/fundamentals.md — EPS, revenue, margins, institutional holdings, catalysts
• references/patterns.md — VCP 7 rules, cup-with-handle, flat base, flag, high tight flag, quality vs fake signals
• references/entry-rules.md — Pivot point mechanics, buy zone, pocket pivot, true vs false breakout identification
• references/position-sizing.md — Formula, stop loss 3-phase evolution, pyramiding, loss handling
• references/market-environment.md — Bull/choppy/bear criteria and position adjustment rules