The NASDAQ posted its eighth straight day of gains on Friday. It closed at 4956 leaving it just 2% short of its March 2000 high of 5049. With a gain of 1.3% for the week it doubled the gains of the other two major indexes but volumes remained well below the 50 day average. The low volume was mostly attributable to uncertainty over the Greek bailout. That should be resolved now there is a 4 month draft deal in the works, so volumes should improve next week and the rally should continue although the some resistance may be met at 5049.

No new Features this week
 

High Tight Flag: Rare but is it Profitable Compared to Cup and Handle?

CEMP broke out from a High Tight Flag (HTF) pattern this week and gained 5.9% until Friday's close. The stock also happened to be in a volatility squeeze before breakout, which may have helped it pop.

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. When we introduced the pattern in 2007, our analysis at the time confirmed Bulkowki (see Newsletter for 12/29/07 ).

Looking back at that analysis now, I see that it was flawed because I only considered the maximum gain after breakout, without considering any drawdown.

I've taken another look at the performance of HTF breakouts during 2014. It was a strong year for breakouts so if the HTF pattern is profitable, we should see it then. I considered performance over 7-14 days which is the  typical period for a swing trader. I didn't consider the day trade situation, or the buy and hold performance. During 2014, there were 56 HTF breakouts.


So while eventual gains might be quite strong, it is unlikely that a trader would have held the position long enough to make an acceptable profit.

When we compare that to the cup and handle pattern we get a much better result. During 2014, there were 686 CWH breakouts.


Now, it may be that HTF positions still held after 14 days may go on to be more profitable than CWH positions but that will require a more detailed analysis.

Conclusion

1. For the swing trader, the cup and handle pattern is substantially more profitable on average than the high tight flag pattern.
2. For the swing trader, it is important to apply stop loss factors. Over 14 days, the average profit for the CWH patter was 4.0% when a 7% stop loss was used compared to 3.2% without a stop loss. That's a 25% improvement.