Cups, cup with handles, flat bases and double bottoms are the most common price patterns that investors will find. But folks should also be on the lookout for the uncommon high, tight flag patterns.
High, tight flags are extremely rare price formations that can lead to stellar gains. Only a few occur during bull markets.
"This is the strongest of patterns, but it's also very risky and difficult to interpret correctly," wrote IBD founder and Chairman William O'Neil in ".
The high, tight flag is a buy setup that allows investors to climb aboard stocks that already had a huge run-up. Investors will many times shy away from stocks that have already made sharp gains. But sometimes, there are more good things to come after the strong initial move.
There are two key pieces to this pattern: the flagpole and the flag. The flagpole is a quick, sharp run-up from a consolidation. Look for a surge of at least 100% to take place within four to eight weeks. This fast and furious move in the flagpole needs to be studied carefully. Otherwise, some may read the price action as a topping signal.
After the flagpole forms, the stock takes time to consolidate gains. Generally, it pulls back less than 20% over three to four weeks. The in a high, tight flag is 10 cents above the high in the flag portion of the pattern.
High, tight flags generally form on stocks of companies whose products or services have the power to really shake up an industry or even change the world. Monster stock market winners Google (GOOG), Qualcomm (QCOM) and Taser International (TASR) each shaped high, tight flags during their enormous runs.
In the late 1990s, licensing company 4Kids Entertainment captured the attention of kids everywhere with its Pokemon television shows.
4Kids broke out from a consolidation in the week ended July 9, 1999 and almost tripled. This surge helped form the flagpole. (1) The stock pulled back to its 10-week moving average in light trade over the next few weeks, forming the flag. (2) The pullback of 28% was a little deeper than norm. Still, 4Kids cleared the 37.85 entry in the week ended Oct. 8, 1999, in higher trade. It popped 146% before retreating.