In the previous newsletter, we discussed about choosing the stock from a fundamentals point of view. This involved looking at financials of a company and selecting a stock which had the potential to grow its fundamentals and its price at the same time. This is one of the stock selection criteria that legendary trader Mark Minervini uses to select stocks. He calls these stocks stage two stocks.

I have always found Mark’s process fascinating. In today’s newsletter, we will understand the concept of stage 2 stocks and the template Mark Minervini uses to identify these stocks.

Concept of Stage 2 stocks

One of Mark’s learnings was that a stocks trend moved in stages:

Stage 1: Neglect (Accumulation)

Stage 2: Advance

Stage 3: Topping (Distribution), and

Stage 4: Decline

He observed that stocks gave rewarding returns when they were in stage two of their trend. In Dow theory, this stage is called the markup phase. Now the challenge was to find the stocks that were in stage 2 of their trend.

The Technical template to identify Stage 2

Mark Minervini wanted to find the stocks which were currently at the beginning of the Stage 2. He wanted to create a template, a list of criteria, that were based on technical factors. This template has the factors relating to trend and Relative strength.

The conditions of the template are as follows:

1. Price should be trading above its 150-day EMA and 200-day EMA

2. The 150-day EMA should be above 200-day EMA

3. The price should be above the 50-day EMA

4. The 50-day EMA should be above the 150-day EMA as well as 200-day EMA

5. Price should at least be 25% above the 52wk low.

6. Current Market Price should be within 25% retracement of the 52 wk high

7. The price should be outperforming relatively to broad market index such as Nifty 50

8. The 200-day EMA should be upward sloping for at least a month

Mark would scan for these stocks from his trading universe. Once the stocks were scanned, he would run his own fundamental filters based on earnings, sales, and margins. At the end, he was left with a very narrow list of stocks which went through another scanner based on Revenue growth, EPS growth, Market and Industry position of the company, liquidity risk etc. Let’s just say Mark was very picky about his stocks.

When these stocks made it to the final list, it was only a matter of trading the right patterns which were his observation in the past. 

Trading the Stage 2 stocks

Mark had observed on several occasions that the price would contract when it had to give a breakout. The price usually formed many “Cup” like patterns before giving a breakout and moving faster subsequent to the breakout. He called these patterns as VCP or Volatility Contraction Patterns. These patterns proved to be very profitable for Mark.

There are any valuable lessons for us as traders from Mark.

First, Mark is very selective about his stocks. He looks for quality of the stock rather than the quantity of the stocks.

Second, he doesn’t mind waiting around and doing nothing until he finds a stock that meets his criteria. He is patient and disciplined about his approach. The stock would spark his interest only if it met his criteria.

Third, Mark is a learner. The template created by him was a result of studying market legends after 1900s. Each aspect of his trading is inspired by one of the market legends.

Fourth, no matter the technological advancements, there is still grunt work required to trade and perform well in the markets. We always look for shortcuts to take in order to reach that elite level of performance. But when we look behind the scenes, there has been countless days of frustration, hard work, confusion, and then success. Mark went 6 years without making a dime in the markets and put in a decade of research to create this template. After this, he had his big break and was able to earn his wealth.

I have created a scanner based on this concept on Radar and Rzone (By definedge).

Go to RZone-> Price scanners -> Candlestick scanner -> Choose Public scanner -> Choose TNT - Stage:2 with Momentum (Version:1), and scan. This will scan the stocks which are currently in stage 2 as per the above template.

This discussion was an introduction to something that I have been planning as a part of TNT one for the exclusive members. Stay tuned and check out TNT one.😉😉