/vcp-screener

VCP Methodology - Minervini's Volatility Contraction Pattern

Overview

The Volatility Contraction Pattern (VCP) was developed by Mark Minervini, two-time U.S. Investing Championship winner. It identifies stocks in Stage 2 uptrends that are forming progressively tighter consolidation patterns before a potential breakout.

Stage Analysis Foundation

The 4 Stages (Stan Weinstein / Minervini)

1. Stage 1 - Accumulation/Basing: Stock trades sideways after a decline. Smart money accumulates.
2. Stage 2 - Advancing/Uptrend: Stock is in a confirmed uptrend. This is where VCPs form. The only stage to buy.
3. Stage 3 - Distribution/Topping: Stock stalls after an advance. Smart money distributes.
4. Stage 4 - Declining/Downtrend: Stock is in a confirmed downtrend. Avoid or short.

Minervini's 7-Point Trend Template (Stage 2 Confirmation)

A stock MUST pass all (or nearly all) of these criteria to be in a confirmed Stage 2:

Pass threshold: 6 of 7 criteria (score >= 85) to proceed to VCP detection.

VCP Pattern Mechanics

What is a VCP?

A VCP occurs when a stock in a Stage 2 uptrend pulls back and then rallies, but each successive pullback is shallower (less volatile) than the previous one. This "volatility contraction" signals that:

1. Selling pressure is being absorbed
2. Remaining sellers are being exhausted
3. Supply is drying up
4. A breakout becomes more probable

Contraction Structure

        H1 (Highest swing high)
       / \
      /   \  T1 (First contraction: deepest)
     /     \
    /       L1
   /       / \
  /       /   \ T2 (Second contraction: tighter)
         H2    \
          \    L2
           \  / \
            \/   \ T3 (Third contraction: tightest)
            H3    L3
             \   /
              \ /  ← PIVOT POINT (buy here on volume)
               P

Contraction Rules

• T1 (first correction): 8-35% depth for S&P 500 large-caps (up to 50% for small-caps)
• T2: Must be at least 25% tighter than T1 (ratio <= 0.75)
• T3: Must be at least 25% tighter than T2 (if present)
• T4: Extremely tight, often < 5% (rare, very bullish)
• Minimum: 2 contractions required
• Ideal: 3-4 contractions with progressive tightening
• Duration: 15-325 trading days for the complete pattern

Pivot Point

The pivot is the high of the last contraction. This is the buy point:

• Buy when price moves above the pivot on volume 1.5x+ above the 50-day average
• Place stop-loss 1-2% below the last contraction low
• Risk per trade should be 5-8% from entry to stop

Volume Signature

Ideal volume behavior during a VCP:

1. During corrections: Volume should decrease (sellers exhausting)
2. Near the pivot: Volume should "dry up" (extremely low, calm before the storm)
3. On breakout: Volume should surge to 1.5-2x the 50-day average

Dry-up ratio = Average volume (last 10 bars near pivot) / 50-day average volume

• < 0.30: Exceptional (textbook)
• 0.30-0.50: Strong
• 0.50-0.70: Adequate
• > 0.70: Weak (caution)

Historical VCP Examples

Classic 3-Contraction VCP

• T1: 20% pullback over 6 weeks
• T2: 12% pullback over 3 weeks (40% tighter)
• T3: 5% pullback over 2 weeks (58% tighter)
• Breakout on 2x volume → 50%+ advance

Tight 2-Contraction VCP (Large-Cap)

• T1: 12% pullback over 4 weeks
• T2: 5% pullback over 2 weeks (58% tighter)
• Breakout on 1.8x volume → 25-30% advance

Common Pitfalls

1. Buying before the pivot: Wait for the breakout, not the setup
2. Ignoring volume: A breakout without volume often fails
3. Wide stops: Keep stops tight (below last contraction low)
4. Wrong stage: VCPs only work in Stage 2; verify with Trend Template first
5. Deep T1: If T1 > 35% for large-caps, the pattern is less reliable
6. Expanding contractions: If T2 > T1, it's NOT a VCP

Position Sizing by VCP Quality