High, Tight Flag Is Rare Pattern That Can Deliver Incredible Gains
When a stock rockets to big gains quickly, it's only human to figure that those playing the stock for even bigger gains are fools. In many cases, the normal human reaction is accurate. For example, if a stock is extended or high in the base count, investors should avoid it.
The high, tight flag, though, is a rare pattern that makes a lie out of that old saying "too good to be true.
Consider the characteristics of a high, tight flag: The stock begins by climbing 100% to 120% in four to eight weeks. Most investors would look at that and say, "Well, it's over. Too bad I missed it.
Next, the stock corrects 10% to 25% in three to five weeks. Most investors would see that drop as a confirmation that they were right to be cautious.
Rare And Amazing
Then the less experienced investor would forget about it, which is the worst thing the investor can do.
Why so
As IBD founder William J. O'Neil noted in "How to Make Money in Stocks," the high, tight flag is "the strongest of patterns." He added,"Many stocks can skyrocket 200% or more off this pattern.
After four years (1999-2002) of never chalking up an annual profit of more than 2 cents a share, stun-gun maker Taser International (TASR) began to find its stride. The company turned in a profit of 10 cents a share in 2003, a 900% earnings increase from the previous year's penny-a-share profit. Revenue increased 149%.
By IBD standards, the company had two things going for it in 2003.
• The stock was still a young story. Taser International's initial public offering was in June 2001.
• Taser had a new product, an electrical weapon that gave law enforcement officers an option that they hadn't had before.
In July 2003, Taser broke out and advanced about 98% in four weeks. The stock corrected 24% in just under three weeks — the flag portion of the high, tight flag.
In mid-September 2003, Taser cleared the pattern's 27.07 buy point and advanced more than 150% in seven weeks. The stock triggered the 8% sell rule two weeks after the breakout but regained the buy point the same week — which means that investors should have repurchased the stock.
A cautious investor had to put aside qualms about the 98% four-week leap — and then the need to buy it back — in order to get a ride on the highflier. Only a well-disciplined investor would've been able to overcome the emotions involved.
At the time of Taser's breakout on Sept. 17, the stock showed a 98 Composite Rating as well as 81 EPS and 98 RS grades.
But there's more to this story. Taser then immediately formed another tight flag! After the more than 150% rise, a new 25%-deep flag formed. Taser cleared the pattern at 69.45 in late November, and this time there was no hitch in the advance. Taser stayed above the ideal buy point and rose more than 450% in five months.
An investor who caught both rides could've bagged a more than 1,300% gain in seven months.
