High Tight Flag Watchlist Methodology

In How to Make Money in Stocks, William J. O'Neil identified the High, Tight Flag pattern as rare but potentially highly profitable. In his Encyclopedia of Chart Patterns, (John Wiley and Sons, 2000) Thomas Bulkowski found they were not so rare but also very profitable, provided you waited for the breakout to enter the trade. We have now developed an algorithm to recognize the pattern and found that it was rare in comparison to the cup-with-handle (CwH) but still found quite often. (see Newsletter for 12/29/07 for pattern performance during 2007).

Our algorithm looks for stocks that meet the following criteria:

they must have formed a handle within the last 3 weeks of trading
the handle must be at least 5 days long
To eliminate takeover candidates, handle decline must be more than 5%
the decline in the handle must be no more than 20% NB. During excess volatility resulting from Covid19, this is increased to 50%
there must have been a gain of at least 100% in the eight weeks prior to the handle formation
there is no minimum price or volume requirement

Some definitions of the high,tight flag (HTF) require that the stock be moving sideways before the rise and that volume be declining in the handle (like the CwH). We have not incorporated those criteria in the algorithm.