Bulkowski’s Flag Day

Written and copyright © 2010 by Thomas N. Bulkowski. All rights reserved.

This article explains the differences between flags and high and tight flags.

Flags

Over the past several months, a number of people have asked questions and referred to high and tight flags when they really meant regular flags. What's the difference?

Let's talk about flags first. I show two variations of a flag in the chart to the right, but there are others (most of them deal with the flag's direction of slope). Price moves in a straight-line run leading to the flag. If you don't have this straight-line run, then you don't have anything for the flag to tie itself to. In other words, a flag must have a flagpole. Without the flagpole, you just have a congestion area, not a flag.

Flagpole

A surprising number of people forget about the flagpole. The straighter and longer the flagpole, the better, I think, because it denotes strong upward momentum. Short flagpoles or ones that show price moving up, but also sideways, means the move after the breakout will likely be weak, too. I discovered that the velocity leading to the start of a chart pattern repeats after the breakout, regardless of the breakout direction. That doesn't always happen, but you can use it as a gauge of how long a trade might take.

The "flag" portion of the flag is where price moves between two parallel trendlines. If the trendlines converge then you're looking at a pennant instead of a flag.

Flag Duration

Flags are short, from a few days to three weeks. The three week maximum is arbitrary, but many regard longer chart patterns as rectangles. I consider short duration flags without proper flagpoles as just congestion knots -- areas of sideways price movement -- and longer flags as rectangles or channels, depending on the slope (if any).

Flag Slope and Volume

The "flag" portion of the flag can slope in any direction, but you'll see it most often like that pictured above -- sloping against the prevailing price trend. Volume trends downward in the flag but don't discard a flag pattern because of unusual volume.

Those are the rules for flags. What I see many doing is drawing two trendlines over an irregularly shaped congestion area and calling it a flag. It's not a flag, just a congestion area. Flags have parallel or nearly parallel trendlines not an irregular shaped border. And they must have a flagpole. Remember that.

Flag Example

Here's a picture of a flag in Flir Systems (FLIR), but if the flagpole were long enough (such that price doubled from the start of the flagpole to the top of the pole), it would also qualify as a high and tight flag.

Anyway, price begins the flagpole at A, rises to B in a wonderful straight-line run. Then price consolidates -- moves sideways -- creating the flag. In this example, price breaks out downward at C before beginning a new upward trend.

If you pay attention to the measure rule, the traditional approach is to measure the height of the flagpole (B-A) and add the height to the bottom of the flag (just above C) to give you a target price. Looking at the figure, I get 29-22.50 for a flagpole height of 6.50. Add 6.50 to 27 gives a target of 33.50, which the stock either hits or comes awfully close to.

High and Tight Flag

A high and tight flag is often not a flag at all. The chart pattern begins when price doubles in less than 2 months. Then price consolidates, usually forming an irregular shape as a flag portion of the pattern. Volume recedes most often in the flag portion of the chart pattern.

High and Tight Flag Requirements

When looking for a high and tight flag, look first for price to double or at least rise by 90% or so. It has to do this in less than two months, too. Once price makes such a large move up, it will consolidate. Consolidate means move sideways of pause in the uphill run, and that pause is the flag portion of the high and tight flag. Usually, you will see price pause near the 100% gain mark. In other words, from the launch price, the stock will double and then consolidate. Sometimes it will rise by 115% or 130%, but most times you'll see price pause near the doubling price.

Two High and Tight Flag Examples

I show a chart of Alaska Air Group (ALK) on the daily scale.

The first high and tight flag begins life at A, priced at 10.10, at its lowest. Then price rises to B, which is the top of the flagpole. That is at 19.83 for a near double in just over a week. Price slides downward, against the prevailing upward price trend and forms a flag which ends at C.

This is one of the nicer looking high and tight flags since the flag actually looks like a true flag.

The second example of a high and tight flag begins at a price of 12.89 (D) and rises to 24.56 (E), for a near-double again, in about the same amount of time as the first high and tight flag.

As you can see, this flag is messy looking since the double occurs when price is already moving sideways in the flag portion of the high and tight flag. Price eases lower, forming the flag which ends at F.

Differences

Notice the differences between a regular flag and a high and tight flag. Both have flagpoles, but the high and tight flag has a much taller one.

A regular flag has price that follows two parallel or nearly parallel lines. The hight and tight flag does not have such a restriction. The "flag" portion of a high and tight flag often isn't a flag at all. It's just a region where price decided to pause in its move upward.

-- Thomas Bulkowski

Written and copyright © 2010 by Thomas N. Bulkowski. All rights reserved. Programming 101: Never test for an error condition you don't know how to handle.