Low volume, profit taking and end of tax year portfolio rebalancing depressed the markets in the final days of the year but the NASDAQ bounced off the 4700 support level to close above its intraday low on Friday.

In response to a suggestion from a subscriber, RS Rank was added to the Daily Breakout Report.
 

High Tight  Flag Pattern Rare but Profitable

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. We developed an algorithm to recognize the pattern and introduced it in 2007. At that time we looked at the performance of the pattern during 2007 and and found that it was rare in comparison to the cup-with-handle (CwH) but still found quite often. (see Newsletter for 12/29/07).

Summary of High Tight Flag Patterns for 2007	All	>= $6	< $6
No.of Distinct HTF Patterns Recognized	165	105	60
No. of Breakouts	53	37	16
Average gain to Max. High after breakout	73%	50%	126%
Average Drawdown before Max. High after breakout	6.43%	4.48%	7.28%

The pattern is rare because of the conditions necessary to create it - few stocks have gains of 100% or more in eight weeks or less, but that is one of the requirements for the pattern to form. This requirement mandates that a stock that qualifies as an HTF will have a very high relative strength - in the high 90's. Our research has shown that stocks with a high Relative Strength Rank, perform well after breakout.

Our algorithm looks for stocks that meet the following criteria:

• they must have formed a handle within the last 3 weeks of trading
• the handle must be at least 5 days long
• the decline in the handle must be no more than 20%
• there must have been a gain of at least 100% in the eight weeks prior to the handle formation
• there is no minimum price or volume requirement

Some definitions of the High Tight Flag require that the stock be moving sideways before the rise and that volume be declining in the handle (like the CwH). We have not incorporated those criteria in the algorithm.

Eight HTF Stocks to Watch

Our HTF watchlist currently lists eight stocks.

Symbol	Industry Group	Industry Rank	RS Rank	Last Close	Breakout Price
OVAS	Biotechnology	179	99	45.83	47.85
PSQ	Closed-End Fund - Equity	88	99	59.63	61.72
RCPT	Biotechnology	179	99	124.81	136.43
SKF	Closed-End Fund - Equity	88	99	50.08	55.28
VIXM	Closed-End Fund - Equity	88	99	63.37	67.99
LJPC	Biotechnology	179	98	17.94	20.15
MTEX	Personal Products	145	98	25.16	29.05
MGNX	Biotechnology	179	97	35.18	38.58