IBD: High Tight Flag

[PuddinHead42]

Andy @buynholdisdead has been mentioning the High Tight Flag Pattern, so here is the article for those that are interested.

The High, Tight Flag: A Rare Base With Big Potential | Investor’s Business Daily

A fast-rising stock could quickly consolidate, break past a buy point and charge on to serious gains. The unwitting investor would never have known this was a rare bird or that there was an opportunity missed.

A high, tight flag has three distinct elements. First, a stock must gain 100% to 120% in a span of four to eight weeks. That forms the flagpole upon which to hang your high, tight flag.

The second element, the flag itself, forms as the stock pulls back, usually 10% to 20% or sometimes 25%, in the next three to five weeks. Price patterns are often wide and loose during these weeks — trading doesn’t have to be tight, as the name implies. But the action appears tight vs. the steep run-up before the base.

Similar to the handle portion for a cup-with-handle base, volume generally dries up. Big fund managers are holding the stock.

Element number three is the breakout, when the stock clears the peak of the flagpole in big turnover, meaning daily volume that’s at least 40% above average.

High, tight flags are high-risk bases. Many fail. Investors must keep a close eye on stocks climbing out of such a pattern.

[buynholdisdead]

That is a good overview Pete. I would also recommend the N in Can Slim as a New idea. Also You want a stock with at least a 10 dollars or higher price. A lot of Bio Techs under 10 will be in there but they are usually prone to break downs. You also want an RS of at least 97 because these are stocks that are really propelling up. Then look to the left on the chart. You do not want any overhead to the left for about a year and a half or more. If there is overhead it could hold the upward movement of the stock. Blue skies are best. Ones that are in the highest rated industries are best although lone wolfs that are going straight up can work also. (Ones in industries that are rated terrible) But be suspicious of them. If trading conditions are great than imperfect ones can work, but if poor trading conditions you must be spot on with a 5 percent stop loss.

[buynholdisdead]

One more thing I should say. I have just started learning on this so I am bound to make mistakes. Anyone that see’s a problem with anything I am calling out, please enlighten us so we can all learn.

[PuddinHead42]

Let’s evaluate $LMND and see if it meets the criteria. At first glance, it looks good, but it did not meet the criteria. My analysis is mostly in the notes, but the move up was not enough and the flag did not consolidate long enough. That day it broke above the flat did have 230% vol above average.

But, I think we can learn from this. What I take away as most important is that the volume really did dry up in that short flag. Some people were happy taking profits, but no one was puking up their stocks. This tells me that when it takes off, it could really fly. If you put a buy-stop at the peak of the left-side high, then you would have been in it on the rocket day. You did not have to risk randomly buying it in the consolidation and then seeing people puking it up to your demise.

The argument no is that it was not a Flag Pole and Flag, but it is still in the process of building the pole. So hang around and watch for that true flag to fly.

That said, I don’t think this profitless stock is the real deal. I bought it when MF recommended it years ago because it was going to use AI to evaluate insurance rates efficient and use an app that did not require humans for customer service or sales commissions. Yay “AI” rules. Nope, nothing special. I sold it this year. Oops.

[buynholdisdead]

Good Job Pete. So let’s look at this. I am going to show you the Weekly chart since you went with the daily. Where you are seeing the flag, I am only seeing a shelf. That flag is only 5 days where it takes 3 to 5 weeks for a proper flag. I think on the Weekly it becomes very clear that the pole is still being formed.

If you look to the left on the charts Pete you can see all the overhead baggage is gone. Maybe the AI is working but as you can tell all the Fintech’s are being bid up. Could it be the election? Could they think less regulation? I don’t know but I like the chart.

That is my take.

[PuddinHead42]

Andy, I created two screens with your starting point, a 1-month and a 3-month. Both require a min price of $10. the 1-month looks for 80% price increase to find them early, the 3-month uses 100% price increase. Getting 27 and 53 items respectively. We find LMND, ROOT, RLAB, RDDT, APP and others we are already looking at. If you sort by EPS rating, you will see a lot of these. I wanted to exclude those with EPS ratings below 50 and that really cuts it down, but it excludes some potential candidates.

[buynholdisdead]

Pete some of the best high flags according to Leif have no earnings yet. (Think of Saas in the early days) So you might not want to cut it down to much. They say you can tell when you are in a bull market because you will get many more hits but when a bear comes along you will not have very many. Thanks for the help.

[PuddinHead42]

Candidate from screen

[buynholdisdead]

That looks really good Pete. I can see why going with a lower growth rate might be a great idea.

[buynholdisdead]

When you are trading these High Tight Flags you want a pole that is around 100 percent, then you want it to flag out for 3 - 5 weeks. At the end of the 5 week you want it to trade down to really low volume and price action. That is your entry. That is the perfect set up.

In Reality: You can’t hold anything to perfection. It is possible that the Pole goes up much more or less than 100 percent. It is possible, what I am finding out now, that the flag does not go down to low volume and price action but forms a shelf and then takes off.

Realize what the market is doing, trade on the spirit of the pattern. Realize what type of market you are in. A bull market in an uptrend with lots of momentum can rectify sloppy trades where a market that is not in a 80-100 uptrend will not.

Edit: Another thing we should all be pounding into our heads is that the upside will take care of itself, its the downside we have to think about. So don’t get excited or run around with steak knives in your hands, always thinking about what happens if it fails. You can lose alot if you are only losing 1 percent of your Capital.

So let’s say you have an account with 100,000 dollars. You have 10 trades on at 10 thousand dollars a piece. You put a 10 percent stop on each of those trades. So you are only risking 1000 thousand dollars and that is 1 percent of your account for each trade. So if that position goes from 10 thousand to 13 thousand you have a 3R increase in that trade. For Traders that is great and they will sell out and buy something else. What I am looking for though is the 10R trades. Doesn’t mean i am going to hold something that long but it is what i want. You have to be realistic though.

Alot of Fomo in this market right now and I do not know how long it will last but that is why I have my stops and check them regularly to see if I need to move them up. Realize in a blow off top the market can move very fast up and then drop exponentially fast to the downside. I am not looking to sell at the top but want to be close to the top. How close? About 10 percent.

Lemmings Jumping off Cliffs

[buynholdisdead]

Look at App. It is going parabolic. This is going to have a big push down but not yet. On a weekly chart you can see all the big blue bars. Heavy accumulation.

[buynholdisdead]

WVE is a high tight flag that is ready to go.

That last bar is an inside day with low volume on the 5th week.

Here is the Weekly chart.

To me this looks textbook. What does everyone else think?

[Lakedog]

@buynholdisdead

WVE is a high tight flag that is ready to go.

Andy, please, please correct me if I’m wrong as I have not read through all your reference material; however, on the daily I am seeing an old short flag that has been broken already.

From classic TA teaching, a Flag or Pennant is a period of consolidation following a rapid rise. That infers a period of stable to slightly decreasing stock prices. There’s a 3 week daily flag/pennant but then there is an increase to new highs. Pattern over. Technically, there’s new highs at day 2, but cutting some slack here.

Weekly is also at new highs at week 3. Now, this doesn’t mean things are going to increase but I wouldn’t go off of flag statistics to predict as I couldn’t apply them here.

Please educate and correct me here. For the record, I like trading off of flags. We’ll have to talk Fibonacci.

Lakedog

[Lakedog]

Reviewed some of the listed “rules” for HTF’s. O’Neill, of course, was a man of weekly’s. In his book “How to Make Money in Stocks” he does give 15 examples of HTF’s. His rules seem a bit looser in the examples as to specific points of defining the top of the pole and the buy point. You can check it our for yourself, pages 131-136

Tried to look at the data in my charts but most of the companies are defunct or so absorbed they are not of value.

Lakedog

[buynholdisdead]

@Lakedog

Please educate and correct me here. For the record, I like trading off of flags. We’ll have to talk Fibonacci.

Hey Lakedog don’t think I am the expert. I appreciate you and everyone else talking about any of this. I won’t get my feelings hurt if you or anyone disagrees. I am perfectly fine being wrong.

Oneil states that the flag has to be no more than 25 percent when it is being formed. If you look at the flag for WVE it is 24.32%. ((16.73-12.66)/16.73=24.32). The flag also has to form within 3-5 weeks. Now if it doesn’t take off this week then it will be to long.

The pole has to go up 100% in 8 weeks or less.((6.86-15.92)/6.86 =132) So it went up 132 percent.

As you said Oneil likes the weekly, what you bring to the table is the daily candles. When looking at the daily candles, the drop from 16.73 to 12.66 was concerning(although I know nothing about it) but since it fit within the parameters I am still considering it a HTF.

Lakedog ,it is interesting that with your chart, I am assuming since it broke the channel you wouldn’t expect this to be considered a flag, correct? It will be interesting to see if this actually fails this week proving your point.

[buynholdisdead]

I will get you some recent HTF lakedog and see what you think of them, I know ASTS is one that was recent.

[Lakedog]

@buynholdisdead

I am assuming since it broke the channel you wouldn’t expect this to be considered a flag, correct?

You should take a peek at his examples. I was struck by three things. First, most flags that I think of are fairly dramatic increases. Steep, rapid climbs (probably cause I’m usually thinking daily’s). His often looked more like momentum continuation patterns, or breakouts over a couple months with fewer individual huge major candles. Often at significant angles to the right.

Secondly, the “Flags” were a lot looser and looking like sideways consolidation with some decline (they cite 10-20% decline as an element). The flag pattern itself is often sloppy.

Third, his buy points seemed to vary in relationship to what he refers to as the last pole candle. Thinking rigidly, I have been taught to use the high of the pole as “the” level. Once the price breaks that, it’s a buy and the pattern has completed. His buy levels are sometimes well above the last flag pole candle (as he marks in the book) and there is at least one chart where he calls one candle a flag consolidation candle, despite it closing above pole candle the day before. The volume also seems a bit more variable than described, but need more experience to really say that.

So, there seems to be a bit more art to this pattern than some others. That’s why I was hoping to look at some of the examples in TOS or Stockcharts to try and better understand the moves, but data on defunct tickers is not simple. The good news is is that this just means you need to play with this approach and adjust it to make it your own.

Edit/Addendum: In common flag/pennant/triangle plays, there is an upper trendline. That is what gets broken and trigger’s the buy. In flags, it is often equal to the price of the last “pole” candle. But I learned that if the price goes above the high of the pole, the pattern is over. I referred to it as the buy above…it can be, but not always. It’s that trendline formed by the pattern and if it is upwards, you no longer have a pattern as there is already momentum up. Hopefully that makes sense.

[buynholdisdead]

Thanks Lake, I am going to look into this more and will get back to you. This is some great information.

[buynholdisdead]

Axon 2003 Ok this is one we can look at. Here it was on a weekly chart.

You see on 7/4 it went above the pole? Or if you consider that part of the pole than it can’t be a flag because it would have only gone 2 weeks. Look at it on a daily.

It is harder to see a flagpole on a daily. But on 7/23 it takes off again on what I am saying was a flag.

So on 6/27 is the end of the flagpole then on 7/25 it takes off again and on 8/15 ends another flagpole. Here is the weekly.

and here is the daily.

That flag was all under the flagpole and formed with 24.32% drop. Hard to see on a daily.

After looking at these HTF’s Lake I think I understand now why Oneill says they are rare. To have a perfect HTF. One that meets all the parameters is indeed rare. But what if we graded them A to F. With A being the rare ones and the others being flawed. Could it be that the flawed ones might work out but just not as often?

If the Flag can’t be formed above the flagpole then the whole 25% drop would have to be under the flagpole. What if it was a false breakout and had to come back in to set up and shake out all the weak hands and then push up? As long as it kept with in the 5 weeks of a flag forming wouldn’t that keep within the parameters? Nothing I see that Oneill writes that the flag can’t go above the flagpole but what you say makes sense. Maybe that is an A setup? I think I have to study this more, and lose more money to see how this works out.

[Lakedog]

Took a look at Axon, have several comments. Here’s a TOS graph of the time period:

First of all, took a bit as dates seemed weird but finally realized IBD marks a week by it’s Friday and TOS by it’s Monday. So not sure these are exactly the dates you were referring to but doesn’t really matter. Secondly, penny stocks are a different bird and sometimes have a hard time following the rules. But they are the quickest to double.

I marked three areas of interest. The first as you also commented on, at the end of June first week of July. Then at the end of August and finally the end of October. You certainly can argue that they meet the spirit of the concept. Yes, there are some minor detail variations, but they undoubtedly don’t really matter. I think a lot of the variations are actually a product of using weekly candles and just how that data rolls.

After staring at this I do believe I’m suffering from trees blocking my view of the forest. I have come to my own personal decision to not focus hard on HTF’s. They certainly occur, and it’s great to learn and get to know of the pattern. They are a subgroup of flag formations which I do like daily and will be more open to watching for weekly ones. Suspect they are just one part of the spectrum. Somewhere I read they are more common in bull markets. Well, duh! Positive bullish moves occur more in a bull market.

@buynholdisdead

If the Flag can’t be formed above the flagpole then the whole 25% drop would have to be under the flagpole. What if it was a false breakout and had to come back in to set up and shake out all the weak hands and then push up? As long as it kept with in the 5 weeks of a flag forming wouldn’t that keep within the parameters?

I think I have directed your focus too hard on small details. Apologies. There are always exceptions, it just seemed like more in O’Neil’s examples in his book which is why I made the comment. And yes, false breakouts occur in all patterns. However, the dynamics and psychology of the false breakout can change the behavior of the ticker. And it might to the upside, but there is now a little more added risk of how it will react next time. Was it a sign of weakness that it failed or a show of anxious hoards ready to carelessly throw money at it? Given an alternative equivalent play, I’d go with a clean setup. Personal choice. Basically like you are suggesting with a “grading” system.

Look at the second blue oval. The first candle in the oval (with the huge volume), is that the end of the first gain aspect of a HTF? Or is it the candle after the doji? But if it’s the second candle, then there is only two weeks of pull back. Is that enough? It doesn’t meet O’Neil’s rules. Point is, variation in all things. I have just been overly critical and focused to try and understand what is important.

I use to routinely search for flag formations, think I need to try and find my old scans and play with them again.

Gotta go check how the old bird is a thawing. Gotta be ready for the brine bath on Tuesday.

Lakedog