The High Tight Flag
The most bullish pattern that ever existed. How to trade it, & why is it a good indicator of a voluptuous Bull market?
In this article, I will explain:
What is a Flag pattern?
What is a High Tight Flag (HTF) pattern?
What is the price target for an HTF?
How to Trade an HTF?
A live example of HTF in the market.
Why is the HTF a good indicator of a Bull market?
What is a Flag pattern?
A FLAG is a bullish pattern, consisting of an UPTREND which forms the POLE; followed by a base which forms the flag MAST.
The basing period is generally shorter than twice the up-trending period (a longer mast would look like a flatbase or a descending channel, but I digress).
A healthy mast should pull back not more than 40% of the pole length.
The mast can be pointing upwards, flat, or downwards.
The mast can take the shape of a channel or have converging trendlines (in which case it is called a pennant. Potaeto, Potato).
The volume dries up inside the mast which is considered very constructive for the pattern.
Now, if there is any strength left in the stock, it eventually breaks out of the mast and resumes the uptrend. This uptrending move could be as big as the size of the flag pole itself.
What is a High Tight Flag (HTF) pattern?
HTF is just a flag with the following characteristics:
The flag pole is > 100% measured from the bottom (or a swing low) and takes around 6-10 weeks.
The flag mast pulls back less than -25% from the pole top.
Mast formation completes between 3-5 weeks before a breakout.
This pattern represents the extreme strength of the stock/instrument. The same strength propelled the stock 100% or more. The pullback of <25% tells us that apart from a small profit-taking exercise, not many holders are selling and that most of them are holding onto their stock looking for even bigger gains. Eventually, this HTF breaks out. A higher volume as compared to the volume inside the mast is a high confidence breakout.
What is the price target for an HTF?
Once and if the breakout occurs, the stock is likely (high probability, but <100%) to climb another the length of the pole, projected from the swing low of the mast (figure below)
How to trade an HTF?
Depending on the shape of the mast, there are either one or two pivot points in an HTF (read more about the perfect entry and a pivot point here). An entry can be made a few points above this pivot with the Stoploss a few points below the swing low of the mast.
If the mast is a flat structure, the resistance of the mast is the same as the pole high which is the only pivot.
If the mast is sloping down, we have 2 pivots: a) the resistance of the descending mast and, b) the high of the flag pole.
If the mast is sloping up, then the resistance of the ascending mast is a preferred pivot point over the pole high.
An ascending mast could either mean a very strong HTF or a faulty mast. The volume on the mast is a key factor to look at for distinguishing between these two.
A live example of HTF breaking out currently in the market:
Gencon
Why is the HTF a good indicator of a Bull market?
HTF being a very bullish structure appears the most during heightened bull markets. My preliminary observation is that the start of a raging Bull market will have the most number of HTFs.
Below is a histogram of HTF in the NSE universe for the last 4 years alongside Nifty 500 data.
2 Key observations:
Most number of HTF during April 2020 i.e the start of post covid bull market.
Bearish divergence with Nifty500 Tops vs HTF number before the market fell.
Numbers are almost at a historical low right now. Calm before the storm?
Therefore the number of HTFs in the market can also serve as a key indicator of a bull market and might also be a good indicator of an impending bear market.
That's all from me today.
I will be discussing at length about this today in my TA masterclass with 35 others, and I can’t tell you how psyched I am.
Also, follow me on Twitter @sakatashomma to learn technical analysis throughout the week.
Happy Weekend,
See you at the next one.
~Prakash