Advertisement
Singapore markets closed
  • Straits Times Index

    3,224.01
    -27.70 (-0.85%)
     
  • S&P 500

    5,254.71
    +6.22 (+0.12%)
     
  • Dow

    39,786.11
    +26.03 (+0.07%)
     
  • Nasdaq

    16,402.02
    +2.50 (+0.02%)
     
  • Bitcoin USD

    71,388.80
    +2,346.26 (+3.40%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,963.92
    +31.94 (+0.40%)
     
  • Gold

    2,234.30
    +21.60 (+0.98%)
     
  • Crude Oil

    82.72
    +1.37 (+1.68%)
     
  • 10-Yr Bond

    4.1850
    -0.0110 (-0.26%)
     
  • Nikkei

    40,168.07
    -594.66 (-1.46%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • FTSE Bursa Malaysia

    1,530.60
    -7.82 (-0.51%)
     
  • Jakarta Composite Index

    7,288.81
    -21.28 (-0.29%)
     
  • PSE Index

    6,903.53
    +5.36 (+0.08%)
     

Learn To Spot Stocks Forming Rare, Profitable High, Tight Flag

The high, tight flag is like the investor's version of a four-leaf clover or a rare gem. The powerful pattern is valuable, but it's rare.

It's also riskier than most other bases. And since the pattern occurs following a big run-up and a short sideways move, it can be a tough gem to spot.

Still, it's worth learning what key elements comprise the pattern, since stocks can go on to triple-digit or better gains after clearing a high, tight flag.

Only a few stocks will set up this pattern during a bull market. Examples of past winners with successful breakouts from a high, tight flag include Taser International (TASR) in 2003 and Qualcomm (QCOM) in 1999.

ADVERTISEMENT

But just as many, if not more, have failed coming out of the pattern, including former Chinese highfliers JinkoSolar (JKS) and NQ Mobile (NQ), in November 2010 and September 2013 respectively.

"This is the strongest of patterns, but it's also very risky and difficult to interpret correctly," IBD founder and Chairman William O'Neil wrote in "How to Make Money in Stocks." "Many stocks can skyrocket 200% or more off this formation.

So what are the characteristics of this potentially lucrative pattern

First and foremost, a stock must rally 100% to 120% in just four to eight weeks. That run-up sets up the "flagpole" for the high, tight flag.

The second element is the flag, which takes shape as the stock consolidates — usually pulling back no more than 10% to 25% — over the next three to five weeks. Trading can appear somewhat wide and loose during these few weeks, but it should look tight compared to action during the steep advance in the flagpole. Use a weekly chart to analyze the action.

Also in the flag portion, volume tends to dry up, like in the handle of a cup-with-handle base.

The breakout should occur in volume at least 40% higher than the daily average, indicating mutual funds and other big players are also snapping up shares. To get the buy point, add 10 cents to the highest point in the pattern.

Qualcomm, which pioneered a cellphone technology called code division multiple access (CDMA), set up this bullish pattern back in 1999 in the midst of a massive rally. The stock had already advanced 16% for the month and 65% for the year by the last week of March.

But it was only priming for the huge rally yet to come, as shares soared more than 180% over the next eight weeks to form the flagpole (1). The stock paused the week ended May 14 (2), when the San Diego-based company split its shares 2-for-1.

Qualcomm fell as much as 28% the next two weeks in below-average volume, setting up the flag. It rebounded off support at its 10-week moving average, then cleared a 119.85 buy point on June 16 in huge trade. Two days later, as the breakout got going, 7 million shares changed hands.

The stock ramped up 40% over the next five weeks, and in December 1999 formed another high, tight flag. By its early January 2000 peak, shares had rallied 2,563% from its January 1999 breakout.

To learn more about stocks, bases and buy points, check out the new IBD University at investors.com.