High-Tight Flag: A Rare & Powerful Pattern

The “high tight flag” pattern is the rarest and most powerful chart pattern in the stock market. Coined by legendary growth investor William O’Neil, the high-tight flag occurs when a stock doubles or more in price in a short period (8 weeks or less). Per O’Neil’s rules, it should correct by no more than 20-25% after the move after the stock has doubled.

It may seem preposterous to buy a stock after such a large move, but the rare high-tight flag pattern has produced some of the biggest winners over the years. For example, Qualcomm (QCOMgained 2000% after breaking out of a classic high tight flag pattern in 1999.

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Image Source: Zacks Investment Research

What Causes a High Tight Flag Pattern?

Like any superstock, rapid, multi-bag advances are simply the sum of immense buying pressure in that particular stock. However, what drives successful high-tight flags is something fundamentally new in a stock – a drastic and positive change. For example, in 2004, Taser, now Axon Enterprise (AXON), saw its earnings soar as non-lethal weapons gained popularity in police precincts nationwide. Taser’s earnings were so spectacular that the stock had two consecutive high tight flags and ran from a split-adjusted $.60 to $60 from 2003 to 2004.

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Image Source: Zacks Investment Research

In 2016, Advanced Micro Devices (AMD) broke out of a classic high-tight flag pattern. In this case, the driving force was that AMD’s chips were beginning to be used in everything from gaming to Bitcoin mining. The stock broke out at ~$8 and never looked back. Currently, shares are trading at $122.

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Image Source: Zacks Investment Research

Is First Citizen’s Forming a High-Tight Flag?

The crisis in the regional banking sector has claimed several banks already and has decimated several in the SPDR Regional Banking ETF (KRE). However, crisis has mutated into opportunity for JP Morgan (JPM) and First Citizen’s Bancshares (FCNCA).

After news broke that Silicon Valley Bank was going under, FCNCA saw its shares plummet. That said, the weakness did not persist for long. In a “sweetheart deal” on March 27th, the company announced that it had entered into an agreement with the Federal Deposit Insurance Corporation (FDIC) to purchase the company’s assets. First Citizen’s gained $110 billion in assets ($56 billion in deposits and $72 in loans) in the deal. To stabilize the banking sector, the FDIC chipped in with a massive $35-billion loan. Investors cheered the news sending shares rocketing by more than 50% in the session alone.

Since the purchase, analysts see a sea change in FCNCA’s earnings picture.

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Image Source: Zacks Investment Research

Because of the strong earnings expectations, FCNCA ranks in the top 5% of the 4,000+ stocks tracked by Zacks and earns the best possible Zacks Rank #1 (Strong Buy).

Technical View

The strength from the news announcement in March until May was enough to build a first high tight flag (the stock is up 30% since breaking out of the initial pattern). Like the Tesla precedent, FCNCA is forming a second high-tight flag. Investors wanting to trade the pattern should look for shares to break over resistance around $1320. Could massive earnings in early August be the catalyst?

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Image Source: Zacks Investment Research

Conclusion

High-tight flag patterns are extremely rare and powerful. Typically, a major fundamental catalyst or industry change is driving the underlying demand for the stock. First Citizens Banc is an example of a company currently etching out the rare pattern.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report

QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report

Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report

First Citizens BancShares, Inc. (FCNCA) : Free Stock Analysis Report

Axon Enterprise, Inc (AXON) : Free Stock Analysis Report

SPDR S&P Regional Banking ETF (KRE): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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