As regular readers know, a “high tight flag” is an extremely rare, bullish chart pattern.
They typically form after an explosive move higher in a stock’s price.
Specifically, when looking for a high tight flag pattern, you need to see a stock climb 100% or more in less than eight weeks.
That’s one of the reasons this pattern is so rare…
It’s just not that common for a stock to double in such a short period of time. However, it does happen.
Sometimes it’s due to a news or earnings release, but sometimes there’s seemingly no new information at all.
Either way, such a move will almost always be accompanied by a large increase in volume, and you’ll see that the rapid increase on the price chart starts to resemble a flagpole.
Raising the Flag
Once the stock has exploded higher and the flagpole has been planted, so to speak, we want to see the flag develop.
Ideally, you want to see a pullback of no more than 25%. Some traders will use a 20% range, but I find 25% works better for me.
This is crucial…
The reason you want to see a limited pullback is that it signals that profit-taking is minimal and most buyers are holding their positions.
In other words, investors are expecting the stock to rise even further, so they’re holding on to the shares rather than taking profits on the big gain they already have.
If the stock can stay within that 25% range for two to six weeks, that consolidation will form the flag that sits atop the flagpole.
The Buy Signal
This brings us to the breakout phase of this price pattern.
Once the stock breaks out of the flag part of the consolidation pattern to new highs, that’s the buy signal.
In other words, you want to buy it as soon as the stock makes a new high.
High tight flag breakouts can easily lead to big double- and triple-digit percentage moves for traders.
Sure, there is some risk involved in buying a stock that’s run so much higher in such a short amount of time.
However, the potential reward easily outweighs the risk if you’re using stop losses properly.
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