Some winning stocks don't pause long enough to give investors a handhold.
But a very few craft a rare pattern called a high, tight flag. Much like a buttonhook pass pattern, this sprint-and-turn-style base gives investors a chance to grab a piece of a winner in the midst of an explosive run.
The pattern has three, distinct elements. First, a stock must gain 100% to 120% in a span of four to eight weeks. That forms the flagpole on which to hang your high, tight flag.
The flag itself forms as the stock pulls back, usually 25% or less, 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, with no big investors moving into or out of the stock.
Qualcomm was already up 16% for the month and 65% year to date as it finished the third week of March 1999. But that was only sharpening the knives for what came next.
The technology pioneer for cellphones and cellular base stations rocketed more than 180% over the next eight weeks.
It hit the brakes when the company announced a 2-for-1 stock split in May, then pulled back 28% in the next two weeks. Volume remained well below average as the stock built a four-week plateau.
Volume kicked back in, with nearly 7 million shares changing hands as Qualcomm cleared the 119.85 buy point on June 18. 1 Shares rose 40% over the next five weeks. They gained more than 560% through the stock's peak in the first week of 2000.
As with any base pattern, you need to make sure a stock meets all other leadership criteria, in terms of earnings, sales and other fundamental measures.
And keep in mind volatile stocks can reverse as fast as they can climb. High, tight flags have broken down more often than they've succeeded recently. Look at Jinko Solar (JKS) in November 2010, or JDS Uniphase (JDSU) in March last year.
More recently, InvenSense (INVN) built a high, tight flag pattern shortly after its November IPO. It rose more than 100% in the eight weeks through Feb. 10.
It pulled back 24% over the next three weeks to test 10-week support. It broke out in huge volume March 12, climbed for one week, then broke down into a deep correction.