sepa-strategy

What this skill does

# 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, funda-data, 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.

---

## 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

---

## 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).

---

## 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).

---

## 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.

---

## 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.

---

## 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
-