Subscribe to RSS feeds Bulkowski Blog via RSS

Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of Bumper.
Kindle
Paperback
Nook
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski's Exploring High & Tight Flags

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 11/22/2017
23,526 -64.65 -0.3%
9,627 11.94 0.1%
758 -0.24 0.0%
6,867 4.88 0.1%
2,597 -1.95 -0.1%
YTD
19.0%
6.4%
14.9%
27.6%
16.0%
Tom's Targets    Overview: 11/14/2017
23,700 or 22,800 by 12/01/2017
9,300 or 9,800 by 12/01/2017
800 or 750 by 12/01/2017
7,000 or 6,500 by 12/01/2017
2,625 or 2,540 by 12/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

 

VRTX on the daily chart

According to the statistics from my book, Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., the high and tight flag is the best performing chart pattern with a 69% average rise after a breakout and a break-even failure rate of 0%. That only means I didn't find any patterns that climbed less than 5% after price closed above the top of the pattern. Do not expect that your high and tight flag will rise by 69%, either. Use the number only as a comparison with other patterns from the book.

I show a chart of Vertex Pharmaceuticals (VRTX) as an example of an high and tight flag in progress. To qualify as a high and tight flag, price must climb at least 90% in 2 months or less, but shoot for at least a double. Then price should move sideways. In a huge number of cases, that will be the end of the pattern because price drops from there. For VRTX, the stock hits a low at A, 13.84, and climbs to B, reaching a high of 26.55 in less than 2 months. Price is forming the flag now. If it closes above B, then that would be the buy signal.

High & Tight Flag Aftermath

VRTX on the daily chart

The chart shows how the Vertex high and tight flag worked out. As the chart shows, price moved horizontally from April to May. Connecting the peaks and valleys of this period shows a diamond top chart pattern. Diamond tops breakout downward 69% of the time, but in this case, the breakout was upward. Price reached a high of 28.66 and a low of 23.75 during this time.

After the breakout from the diamond top, price climbed to 28.31 before throwing back to just below the breakout price (reaching a low of 25.01 -- just above the round number 25) before running upward again. Price reached a high of 35 on July 9 (point 2), as the middle peak of a triple top chart pattern. Not shown, but after price peaked at 3, it tumbled, dropping to a low of 24.62, recovering to 34.71 and then plunging again to 18.43 -- almost half of what it was at point 2.

Top of page   More

The Flag

Tight versus loose flag

When searching for the flag portion of the high and tight flag, look for price to move sideways in a tight congestion region. Tight regions tend to lead to better climbs after the breakout. You might consider avoiding those with loose looking flags or flags that are too long (over 5 weeks). And by "flag", I mean a congestion region, not a true flag chart pattern. The congestion region is often irregular in shape.

The figure contrasts a tight looking flag and a loose one (borrowed from flags). For the best performance, look for tight consolidation regions, ones with lots of price overlap and often a horizontal price movement. Loose looking flags have price meandering all over the place.

The volume pattern should trend downward (recede) for the best post-breakout performance, too.

After a high and tight flag forms, then wait for price to close above the top of the pattern. Do not use a trendline break of the flag portion as the buy signal because too many of these patterns will show price failing to move higher even after a trendline break.

After the breakout, be conservative and look at a 50% move up, but be careful. These rockets go up fast and can return to earth just as quickly. In Vertex, the price moved from a low of 13.84 to 27.24 then formed the diamond top. This was the flag. If you bought at a penny above the top of the flag, that would have put you into the trade at 28.67. As mentioned, the stock climbed to 35 for a gain of 22%.

What Went Wrong?

Why did Vertex underperform with a gain of 22%, far below the average rise of 69% for high and tight flags?

One answer comes from the shape of price on entry into the high and tight flag. Notice how Vertex has a V-shaped price pattern (see the first chart). Price actually begins the decline in September 2007, from a high of 41.42 and touches down at a low of 13.84, a massive drop of 67%. Then price bounces, retracing 77% of the decline in the high and tight flag pattern.

During the bear market of 2008, I saw dozens of high and tight flags appear after very strong downtrends like the one experienced by Vertex. In nearly all of the cases, the post high and tight flag rise -- if any -- was meager at best. This happened frequently when price was tumbling in the bear market. When the stock bottomed at the bear to bull market turn, price formed another high and tight flag. With the market winds pushing stocks higher, in several cases, it helped the stock move up out of the flag portion of the high and tight flag.

Top of page   More

Not So Perfect Example

Energy Conversion Devices (ENER) on the daily chart

Contrast the first chart of Vertex with Energy Conversion Devices (ENER). This chart is on the daily linear scale and not a logarithmic scale as are the other two.

In ENER, price moved almost horizontally in a flat base structure from August 2006 to March 2008. That is when price started to move up. It continued traveling horizontally during April before gapping up in May 2008. Price formed a flag soon after peaking at 58.69. Ultimately, price climbed to a high of 83.33, a gain of 42%. This is not bad but still well below the 69% average rise.

I think the keys to selecting high and tight flags that work are the following.

  1. Avoid V-shaped patterns, in which price drops dramatically leading to the start of the high and tight flag.
  2. High and tight flags springing from flat bases or rectangles work better.
  3. Check other stocks in the same industry. If they are moving up, you stand a better chance of having a good gain.
  4. Predict the market direction. If the market is rising, then good. If the market looks about to drop, then avoid the trade.
  5. Look for a tight flag. Loose flag patterns suggest a worse performing high and tight flag. A tight flag means lots of overlap between price bars, a horizontal price movement, not one that meanders all over the place.

-- Thomas Bulkowski

Top of page   More  

See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Statisticians probably do it.