What is a Volatility Contraction Pattern (VCP)?

The Volatility Contraction Pattern (VCP) is a powerful technical analysis pattern developed by Mark Minervini to identify stocks with bullish potential and minimal risk. It’s a price pattern that forms during a consolidation phase within a longer-term uptrend.

VCPs are characterized by a series of price contractions, where each successive price range becomes narrower. This pattern is built upon the principle that stocks tend to move through phases of accumulation, consolidation, and eventual breakout.

Imagine a stock that starts at $100. It pulls back to $85 (a 15% drop) and recovers to $95. Then, it contracts again, this time only pulling back to $90 (a 5% drop). Finally, it tightens even further, oscillating between $92 and $94. These progressively smaller movements reflect the VCP’s characteristic contraction.

When the stock breaks above $95 on high volume, it confirms the breakout from the Volatility Contraction Pattern, signaling the beginning of a potential price rally.

Key Characteristics of the Volatility Contraction Pattern

To successfully trade a Volatility Contraction Pattern (VCP), it’s important to recognize its defining features. Let’s explore the key elements that make this pattern so powerful.

Progressive Tightening of Price Ranges

One of the hallmarks of a Volatility Contraction Pattern is the stock’s price volatility shrinking over time. Each pullback becomes smaller than the last, creating successively tighter swings.

• For example, an initial drop of 15% may be followed by a smaller 10% contraction, and then a final 5% contraction.
• This progressive tightening reflects a diminishing supply of shares for sale as sellers are gradually absorbed by buyers.

When you spot these smaller price swings, it’s often a sign that the stock is gearing up for a breakout.

Volume Contraction

As the price consolidates, trading volume should also shrink during the contraction phases. This signals reduced selling pressure as fewer participants are offloading shares.

• Look for a steady decline in volume as the pattern forms, followed by a sharp volume spike when the breakout occurs.
• This volume surge shows that buying demand has overwhelmed the remaining supply, confirming the breakout.

In a healthy VCP, the relationship between price and volume is key. Tight price action paired with drying-up volume is like the calm before a storm—a breakout is often just around the corner.

Formation of the Pivot

A critical feature of a VCP is the formation of a clear breakout level, often called the pivot point.

• This is a price level where resistance becomes obvious. The stock consolidates near this area, and when buying pressure builds enough, it breaks through.
• The breakout often leads to explosive price action as pent-up demand sends the stock higher.

Think of this line as a gate. Once the stock pushes through, it’s free to run.

Constructive Technical Action

Healthy Volatility Contraction Pattern setups show supportive technical behavior that increases the odds of a successful breakout. Some key traits include:

• Higher lows during each contraction, signaling that buyers are stepping in earlier each time.
• Quick recoveries after small pullbacks, a characteristic Mark Minervini calls “tennis ball action.” These quick bounces show strength and a lack of heavy selling.
• Closes near the upper end of the daily range during tightening phases, reflecting consistent buying interest.

These signs of strength and stability can help you identify the best VCP setups to trade.

Why Tight Consolidations Matter

Tight areas within a Volatility Contraction Pattern are vital for identifying low-risk, high-reward setups. These are moments when the stock trades in a narrow range with declining volume, signaling that sellers are stepping away.

Benefits of Tight Areas:

• Clear entry points: They highlight logical buy levels for precise risk management.
• Signs of accumulation: Institutional buyers often build positions during these periods, leading to future strength.

How Supply and Demand Shape the Volatility Contraction Pattern

Supply and demand dynamics are central to the formation of the Volatility Contraction Pattern (VCP). The interplay of these forces determines the price and volume behavior that characterizes this pattern.

Decreasing Supply

In the VCP, the stock undergoes a series of pullbacks or corrections, with each pullback being smaller than the last. This reflects a diminishing supply of shares available for sale.

As the stock price contracts, sellers are progressively absorbed by buyers. The initial corrections might see significant selling pressure, but as the pattern progresses, fewer shares come to market.

During the price contractions, volume shrinks. This is a critical indicator that selling pressure is drying up, as fewer market participants are willing to sell at lower prices. The lighter volume during consolidations shows that the supply of shares is limited.

Increasing Demand

During the tightening price action, demand begins to outpace supply. Institutional Investors often accumulate shares quietly during this phase, pushing the price higher after each pullback.

The tightening price range indicates that buyers are stepping in at higher levels (creating higher lows) and supporting the stock.

When demand overwhelms supply at a critical pivot point, the stock breaks out of the VCP. This breakout is usually accompanied by a significant increase in volume, as buyers compete to secure the limited shares available.

Balance Between Supply and Demand

As supply diminishes and demand increases, the stock establishes a clear resistance level (pivot point) where it consolidates. This “line of least resistance” is the level where the stock eventually breaks out.

The progressive tightening of price and volume reflects a state of equilibrium, where neither buyers nor sellers dominate until the breakout occurs.

Breakout Dynamics

The culmination of the Volatility Contraction Pattern occurs when demand decisively overwhelms the remaining supply. This triggers a breakout above the pivot point on heavy volume.

The magnitude and speed of the breakout often depend on how tight the price action was leading up to the breakout. The tighter the range, the greater the build-up of energy and the sharper the breakout.

Volatility Contraction Pattern Examples

Screening for Volatility Contraction Patterns

Deepvue streamlines your stock analysis with Screener Presets, allowing you to effortlessly identify stocks that meet specific, pre-established conditions. Screen for Volatility Contraction Patterns like Mark Minervini using these guidelines.

Mark Minervini’s Power Play Screener

The Power Play is a concept that identifies rare and explosive trading opportunities in stocks. These setups occur under specific conditions where the underlying stock demonstrates extraordinary strength and momentum, suggesting that it is a potential leader in the market.

The main function of the Power Play screener includes a large price increase and a recent price consolidation.

• 6-Month Price % Change > 85%
• 15-Day Price % Change -15 – 5%

Deepvue’s Tight Range Screener

The Tight Range Screener utilizes Deepvue’s Relative Meraured Volatility indicator. These setups occur in highly liquid stocks when the RMV is low and the 5-day percentage range is less than 8%.

The main function of the Tight Range Screener is to identify stocks that are trading in a tight range relative to a higher timeframe move.

• RMV 15-Day < 10
• 5-Day % Change -4% – 4%

Volatility Contraction Pattern (VCP) Video