Several stocks popped up on the “High Tight Flag” scan last night, two of which garnered commentary in the trading room over much of 2016. AKS and X are highlighted in todays post. You should also note, nearly all steel stocks exhibit similar patterns, as the group is being bought by institutions.
Apparently CNBC and Dennis Hartman got the memo as well, as they are bullish “Steel Stocks.” Don’t let this deter you, as a broken watch is right twice a day.
First let’s discuss the pattern, for those of you who have never heard of the High Tight Flag.
The number one pattern out of twenty three studied, by Tom Bukowski, in his book about Chart Patterns, was the High Tight Flag. Mr. Bulkowski studied hundreds of stocks in each of the 23 patterns, over a period of several years, before writing several books on the subject. Encyclopedia of Chart Patterns is the most commonly referenced. William O’Neil, founder of Investors Business Daily, also researched the High Tight Flag pattern. What Bulkowski arrived at mirrored O’Neil in most cases.
So, what is a High Tight Flag?
The pattern owes its appearance to several catalysts.
A new product, a high demand commodity or service, that has institutions excited.
Institutions validate the product/commodity or service by accumulating shares. In fact, during the building of the pole, the volume often ramps up as institutions and fund managers fall all over themselves trying to scoop up shares before the street notices.
Fast accumulation forms the pole in less than 60 trading days. Vertical poles do not do as well as more gradually sloped patterns.
After the initial accumulation shares consolidate. The High Tight Flag pattern is what we are looking for after the pole is formed; the tighter the flag or pennant the better. This consolidation typically takes several days to more than two weeks. I’ve found that getting hung up on the time the stock takes to consolidate its recent gains negates too many otherwise healthy stocks, that go on to handsome gains. With regard to the consolidation pattern Mr. Bulkowski says this in his book, on page 353,
“Once the stocks are selected on a price-rise basis, then look for the nearest consolidation area. In my selections, I did not care how long the stock consolidated nor how far the flag descended before turning upward. All that mattered was that the consolidation area was plainly visible to the casual observer. The consolidation area should be about double the price of the prior 2-month low.”
AKSteel Holding (AKS) meets all of the criteria. We see accumulation of shares over the past 60 trading days. As prices rose, we see appreciation of more than 90%. Finally we see a tight flag. This is an infrastructure play.
Bollinger Bands are tight and ready to explode. RSI, MACD and STO suggest higher prices. The whole industry group is experiencing elevated interest, as most steel stocks are moving together.
AK Steel Holding Corporation is expected* to report earnings on 01/24/2017 before market open.
US Steel shows the same pattern, one reason why we are bullish on the group.Volume looks better, as US Steel traded 21 million shares Wednesday. Institutions are positioning. The pattern lends itself to an average 60% gain after the breakout.
United States Steel Corporation is estimated to report earnings on 01/24/2017
Several other stocks appeared on the scan that we have traded recently. Those charts are posted below, so you have a chance to analyze them for a possible trade.
AKAO was recently brought to our attention. Jean traded this stock the week of December 12. AKAO reported a 25% beat in its recent report on 11/07/2016.
We traded BRS just after the election, when the stock appeared on the most active list(s). This group will continue to see bullish flow, as an outcropping of the Trump deregulation agenda sweeping through the energy sector.
Bristow Group Inc is estimated to report earnings on 02/13/2017.
FRED was another recent trade that popped on news that RiteAid and Walgreens Boots Alliance would divest over 800 stores through dealings with the SEC. FRED would receive those stores as part of the proceedings. EPS 12/08/2016.
HIIQ should move higher, along with the Healthcare Sector bullish flow that we’ve seen recently in XLV. HIIQ reported a 200% beat (0.33 vs. 0.11) on 11/02/2016.
We would suggest reading more about this pattern and others highlighted in Bukowski’s book. Understanding the statistical possibilities inherent in particular chart patterns gives you an edge that most traders do not possess. Coupling this pattern knowledge with a strategy based approach is one of hallmarks of a successful trader.
Happy Trading – Vinny