Rare High Tight Flag Offers Investors Opportunity For High Returns | stockbee

7/09/2007

Rare High Tight Flag Offers Investors Opportunity For High Returns

Investor's Business Daily today has a description of "Rare High Tight Flag Offers Investors Opportunity For High Returns". This they present as a opportunity to find stocks with extra ordinary momentum, which pause for a short period of time and then again breakout.

When stocks create proper bases and break out of them, they provide investors with sound buying opportunities.

Common patterns include the cup with handle, flat base and double bottom. Less common are the saucer and ascending bases. The rarest of all is the high, tight flag.

If you're lucky, you'll spot one or two of those in a bull market. They provide an opportunity for serious gains if formed correctly — and you recognize them properly.

The stock will usually surge 100% to 120% in a short period of time, four to eight weeks. This forms the pole of the flag.

It will then correct no more than 10% to 20% in three to five weeks, tracing the flag portion.

The ideal buy point is at the peak of the flag plus 10 cents.

Investors can make 200% on a stock that surges from such a pattern, which acts as a brief pause amid a huge advance.

But it's also a difficult formation to interpret correctly.

Syntex is a classic example of a high, tight flag, even though it happened way back in 1963.

More recently, Taser International (TASR) displayed similar characteristics in 2004.



Now one way to look at such opportunities is by visually finding such stock. The other better method is by following the Double Trouble scanning methodology.

If you look at what IBD is saying closely, we can break down key elements of the statements:
The stock will usually surge 100% to 120% in a short period of time, four to eight weeks.

It will then correct no more than 10% to 20% in three to five weeks, tracing the flag portion.

The ideal buy point is at the peak of the flag plus 10 cents.

Investors can make 200% on a stock that surges from such a pattern, which acts as a brief pause amid a huge advance.

Here is a Telechart interpretation of the same:

8 weeks price growth>100%

( 100 * (C - C40) / C40) >= 100

Correction of no more than 10% to 20% in three to five weeks.
Here we use the 15 day (3 week)growth value to sort stocks meeting above criteria.
100 * (C - C15) / C15

So the stocks meeting the first condition of 100% growth in 40 days can be sorted with the value of second scan to look for stocks which are pulling back or pausing. As of today no stock meets both the conditions. But as the article says, such stocks are rare so you will anyway get only few stock meeting this criteria.

Update: Based on the comments and emails I got, you can update the scan to

( 100 * (MAXC40 - C40) / C40) >= 100

Rest of the conditions are more guidelines, so making too specific scans for them might not serve much purpose.
To eliminate lower liquidity stocks you can use a cash flow scan:
AVGC20 * AVGV20 >= 2500

16 comments:

ybn said...

In your opinion, do HOKU and LPHI qualify as being in a tight flag waiting for the new breakout?

Pradeep Bonde said...

HOKU is just a weeks worth of weakness. LPHI, may be.

hector said...

hi Pradeep, i just runned the scan and i got 7 stocks...BCON,SMTX,LOCM,NPLA,TMTA,TECUA. They all on the positive as of 10:35 central time, however, HOKU ,you can see clearly the flag bottom 7/2/07..Am i wrong? also, how can i save a chart of telechart so i can send it to you, i think i got a setting that i found in telechart of a variation of your indicators and it points out the flags very easy to spot...or maybe im crazy and seeing things, just want your opinion

Mike Summers said...

I think VOXW is something resembling a tight flag, however, it still is a ways from the buy point

hector said...

look at this examples ;
TRCR 6.28.07
HOKU 7.02.07
CROX 7.02.07
RCCC 6.20.07
AZZ 6.27.07
CRNT 6.26.07
EVST 6.27.07
i found many like this,am im seeing flags or something else?

Pradeep Bonde said...

Some of these stocks are two low priced for IBD criteria, plus they need liquidity. Plus IBD good EPS ratings.
If you are finding too many high tight flags, there is something wrong with your interpretation of that article. It is rare but very profitable pattern.

hector said...

hi Pradeep, so i should be using IBD 200, IBD 85- 85? examples past..
LPHI 6.01.07 FLAG, return till 6.26.07 96 %
TBSI flag 6.12.07 return so far in trade 46 -56 % depending of entry..TNH flag 5.25.07 return 60 % in trade
BIDU flag 6.11.07 return 40 % in trade
HOKU kind of flag variation 6.13.07 return at exit in 6.27.07 162 %
i dont know if these two are in IBD, but they had EP..
RDNT flag 5.18.07 return in trade 77%
TASR flag 5.18.07 return in trade 58 % OR maybe
i found my 'niche' according to Brett Steenbarger's book "Enhancing Trader Performance"(Highly Recommended for EVERYONE)

hector said...

Forgot to say "THANK YOU", im learning a lot from YOU..my hat again to you

QUIKTDR said...

What do you set your range selector at for the correction PCF? I set it at 99 and I still get 9 candidates; HOKU, LOCM, TMTA, BCON, SMTX, TECUA, NPLA, LIV, and APTM

hector said...

in trade means still in the stock waiting for an exit signal

hector said...

i get the same as quiktdr

optrader said...

Hi Pradeep

Would INSW classify as a flag? It is an IBD Under $10 Relative Strength stock.

Pradeep Bonde said...

Quiktdr
First scan is true or false condition. That is giving you the candidates.
Second scan will give you value. Which is used to sort.
The description by IBD gives a range, so setting specific values for second is not going to be very helpful.

Optrader
No
the flag is of 3 to 5 week duration according to IBD , in your example stocks has done nothing in that time frame.
Plus all these candidates most of you people are mentioning have no volume to qualify for enough trading liquidity.

Tim said...

This pattern is extremely rare in stocks above $10-15 per share. One item with the scans presented is the 100% move is to the start of the flag and not the current day. I suggest scanning back 15 days to find the 100% move. Here are some simple scans I created quickly that may work ok (will still need visual inspection).

maxh10.15/c55>=2
c/c15<=1.1
c/c15>=.9
c/maxh10.15<=1
c/avgc50>1

I suggest adding price and volume requirements as well. While this is a rough scan, it did 'flag' TRCR in Feb/Mar and MFW in Mar.

Lycurgus said...

I can't claim to be scientific on this but nearly each "possible high tight flag" I've seen IBD trumpet in the past year has been a lousy trade, if not an "exhaustion top." I love IBD and it is one of my primary screens, but I'm also a little tired of the Syntex war stories. Anyhow I enjoy your blog stockbee keep it up!

Pradeep Bonde said...

IBD rewrites the history to fit its model all the time. If you see a 2 year old IBD copy, you will see IBD saying this stock is overextended or something, but if that stock goes on to make more move it will promptly put it in the Investor's Corner.