Strategies — deeper

The strategy library shows today's candidates for each of the 12 setups we screen. This page goes a level deeper: where the setup comes from, why it works on average, when it fails, and the common mistakes traders make running it.

We cover four of the most-used setups in detail. The others on /strategies have shorter descriptions; this is the longer-form companion.

1. Stage 2 trend continuation (Weinstein)

The theory

Stan Weinstein's Secrets for Profiting in Bull and Bear Markets (1988) defined four stages every stock cycles through:

• Stage 1 — basing. Sideways action after a downtrend. Volume drying up. The "accumulation" phase.
• Stage 2 — advancing. Price breaks out of the base. Rising 30-week (or 50-day) moving average. The "uptrend" phase.
• Stage 3 — topping. Volatility increases, advance falters, distribution begins.
• Stage 4 — declining. The other side of the cycle.

Weinstein's claim: most of a stock's gains happen in Stage 2. Buying in Stage 1 too early traps capital; buying in Stage 3 catches the top; Stage 4 is short territory. The trend-continuation setup is designed to enter during Stage 2 — after the breakout has already happened, with confirmation — and ride to Stage 3.

The math we apply

Khabir flags Stage 2 when:

• Price > 50-day SMA AND 50-day SMA > 200-day SMA (the moving averages stack)
• 50-day SMA is rising (calculated over 20-day window)
• Relative strength vs SPY positive over 3 months
• RSI between 40 and 70 (neither dead nor extreme)

When it works

Bull markets with broad participation. Sectors rotating into leadership. Names where the trend has time to compound — multi-week to multi-month holding. Examples: NVDA from 2023 onward, MSFT 2017-2021, AMZN post-2009.

When it fails

Choppy, range-bound markets. The trend reverses two days after entry, the moving average flattens, and you're stopped out at lower prices. Particularly painful when many "Stage 2" names break together — a sign the broader market regime is changing.

Common mistakes

• Stops too tight. Stage 2 names can pull back 5-8% to the 50-SMA without breaking the trend. A 2% stop will whip you out repeatedly. Use a 1.5-2× ATR stop or "below the rising 50-SMA".
• Selling too early. The whole point is to ride the trend. Selling at +5% misses the move's actual run. Use a trailing 50-SMA stop or wait for Stage 3 evidence (RSI > 75 with declining volume, breakdown of the 30-week MA).
• Confusing Stage 2 with extension. RSI 80, price 30% above 50-SMA — that's late-Stage 2. Wait for a pullback or move on; chasing extensions has poor expectancy.

2. Pullback to 50-SMA

The theory

Within an established Stage 2 trend, stocks oscillate around their 50-day moving average. After a strong push higher, profit-taking brings price back to the 50-SMA, where new buyers (who missed the move) step in. The first touch of a rising 50-SMA from above has historically been one of the highest-expectancy entries in equity trading — Mark Minervini, Jesse Stine, and others have built systematic approaches around it.

The math

• Stage 2 confirmed (50-SMA rising, above 200-SMA)
• Price within 1% of the 50-SMA, approaching from above
• RSI 40-55 (the recent push has cooled but not broken)
• Relative strength vs SPY still positive

When it works

Healthy uptrends pausing for breath. Names that have already proven buyer interest in past pullbacks. Sectors where the underlying theme is intact (AI infrastructure, weight-loss pharma, energy supercycles).

When it fails

Late-stage trends where the 50-SMA finally breaks. Choppy markets where the "pullback" turns into a 15% drawdown. Names with deteriorating fundamentals — the technical setup looks identical to a healthy one until earnings hit.

Common mistakes

• Buying the second pullback in a weakening trend. The first pullback to a rising 50-SMA is strong. The third is dangerous — by then the trend is suspect. If the 50-SMA itself has flattened, the setup is invalid.
• Pre-empting the touch. Buying on the way down anticipating support means you're guessing. Wait for the actual bounce — first green day at the MA, ideally with elevated volume.
• Ignoring the broader tape. When SPY is also pulling back, individual pullbacks have lower follow-through. Best results come during in-trend market environments.

3. VCP — Volatility Contraction Pattern (Minervini)

The theory

Mark Minervini's Trade Like a Stock Market Wizard (2013) popularized VCP: a series of increasingly tight pullbacks on declining volume, ending in a breakout above a pivot point. The contractions reflect supply being absorbed — each successive pullback is smaller because fewer holders are willing to sell at lower prices. When the pivot finally breaks on increased volume, the resolution is often violent.

The math

• Stage 2 confirmed
• At least 2 successive pullbacks, each tighter than the prior (e.g., 8% → 5% → 3%)
• Volume declining through each contraction
• Price within 3% of the pivot (the high of the most recent contraction)

When it works

Established leaders consolidating after a strong move. Bull markets with breadth. Names with a real catalyst behind them (earnings cycle, new product, sector tailwind).

When it fails

Weak markets — failed pivots are common when broader breadth deteriorates. Names that look like VCP but lack the underlying earnings strength (Minervini's framework requires fundamental quality alongside the technical pattern; we don't enforce that on our screen, so you should add it yourself).

Common mistakes

• Calling every consolidation a VCP. A real VCP has the contraction sequence — measurable. Random sideways action isn't it.
• Ignoring volume. The contractions must be on declining volume. Heavy volume during the "contraction" suggests distribution, not absorption — opposite signal.
• Buying the failed breakout. If the pivot breaks and price closes back below within 1-3 days, the setup has failed and the next move is often lower (trapped longs need to exit).

4. PEAD — Post-Earnings Announcement Drift

The theory

PEAD is one of the longest-documented anomalies in academic finance. Bernard & Thomas (1989, 1990) first measured it; subsequent papers have replicated it across decades and markets. The pattern: stocks that beat earnings continue to drift up for weeks afterward; stocks that miss continue to drift down, despite efficient- market theory's prediction that prices should adjust instantly.

Why it persists isn't fully explained. The leading theories:

• Analyst sluggishness — Wall Street analysts revise estimates slowly after surprises, and price tracks consensus.
• Behavioral underreaction — investors require multiple data points to update their models.
• Limits to arbitrage — funds with risk constraints can't pile in fast enough to close the gap.

Whatever the cause, PEAD is real and has been tradeable for 35+ years.

The math

• Earnings beat ≥ 5% above consensus EPS
• Earnings-day gap up ≥ 4%
• Stage ≤ 2 (not already extended into Stage 3)
• Within 30 days of the earnings report

When it works

Strong beats with raised guidance — both numbers move analyst targets up. Quality companies in healthy sectors. Multi-week holding periods (the "drift" plays out over 3-8 weeks; intraday is often noise).

When it fails

In-line beats fade quickly — without the surprise, there's no drift. Broader market weakness kills drift in days even on real beats. Names with elevated short interest where the post-earnings gap squeezes shorts and then reverses (less drift, more fade).

Common mistakes

• Chasing the earnings-day gap. The optimal entry is usually 1-3 days after the gap, on the first pullback or consolidation. Chasing the open creates terrible R:R.
• Holding too long. The drift typically plays out over 4-8 weeks. After that, the next earnings cycle becomes more important than the last beat. Set a time-based exit.
• Ignoring guidance. A beat without raised guidance has weaker drift. A beat with raised guidance has the strongest historical follow-through.

Combining setups

These setups aren't mutually exclusive — a name can qualify for several simultaneously. When that happens, the historical edge tends to be larger. A Stage-2-trending name in a strong sector that just beat earnings AND is forming a tight base is a far higher-conviction setup than any one of those signals alone.

The strategies page surfaces multi-setup names automatically — each candidate row shows which strategies it currently fits. When two or more high-conviction setups overlap on a single name, that's meaningful.

Going deeper

If you want to study the source material:

• Stan Weinstein, Secrets for Profiting in Bull and Bear Markets (1988) — the canonical Stage analysis text.
• Mark Minervini, Trade Like a Stock Market Wizard (2013) — VCP, fundamental + technical fusion.
• William O'Neil, How to Make Money in Stocks — Cup & handle, CANSLIM framework, base counts.
• Bernard & Thomas (1989), "Post-Earnings-Announcement Drift" — the academic foundation for PEAD.
• Pradeep Bonde, Stockbee.biz — Episodic Pivot framework.