High and Tight Flag Case Study: Digital Wine Ventures (DW8.ASX)

In share market investing, one of the most reliable and profitable chart partners is a High and Tight Flag (HTF) which is used by a lot of traders and speculators. Often the HTF provides 75% – 100% returns in a matter of a weeks after the buy signal is triggered.

The rapid, fast moves from HTFs make them one of the most popular short-term trading patterns.

The HTF is created by a company which has already had an explosive share price movement – and when indicated correctly, points to another explosive move up in the share price shortly afterwards.

We’re going to explain how the pattern is set up, what to look for, what to avoid, and the extra feature which doubles the success of this trading strategy.

1. Trade Set up.

HTF is one of the easiest chart patterns to spot.

There has to be a large explosive movement, such as we saw in DW8 four (4) times in 2020, shown in Chart 1 below.

Each of the four HTFs highlighted on the DW8 chart have had an explosive movement of at least 75% share price gain in a short period of time. These are shown as the vertical lines for each pattern, which are known as the 'flagpoles'. Each HTF flagpole should:

Be as straight as possible
Have many explosive share price movements, gaps or jumps
Have strong volume supporting the movement up
Contain little to no pullbacks within the rising pattern / flag pole

DW8 has four flag poles, where the diagram shows the rally from the low in June of 2020 and the rapid rises to each of the flag poles. However, the flag poles are normally calculated, or drawn, from the recent breakout from the last HTF.

HTF #1

The orange flagpole runs from around $0.06 to a high of $0.12 within a few days. That’s a 100% gain and viable for a flagpole.

HTF #2

The green flagpole can be calculated from either $0.11 where the breakout from the orange HTF was, or the base at $0.06 as this was all created in a short time.

HTF #3

The blue flagpole has seen a sideways shimmy and congestion in the Green flag, which tends to negate the rally from $0.06 as there was more time taken within this flag and somewhat of a pullback.

HTF #4 The purple flagpole starts from the breakout of the blue flag around $0.035 and runs up to $0.065 for an 85% gain. This is a valid rally for a flagpole as the rally is greater than 75%

2. The Flag formation

The 'flag' is the congested part of the pattern.

Below is a close up of the second HTF on DW8’s chart. The green converging lines show the flag formation. This is the best, or most conforming flag of the four patterns for DW8.

The flag should:

Be a tight consolidation of the share price, with much less volatility
Remain in the top half, preferably top third of the recent rally / flagpole
See a rapid reduction in volume (see the green, downward sloping line in the bottom of the chart above)
Be either a right-angle triangle with a hard bottom, or lows that confirm to similar prices, making a support level, or floor, that seems to not want to be broken.

Or

Be a flag that shows a channel in which the share price stays in the channel throughout the pattern. DW8 does not have a great example of this flag formation. DW8 has mostly triangular shaped flags where the downward spikes are supported or have 'price floors', in the flag.

3. The Breakout - Buy Signal

The breakout from a HTF formation should have a strong bullish candle with explosive volume, preferably 300% or more of the volume seen within the flag.

HTF #1 The orange flag is short, sharp and explosive, both at the start and the breakout.

The volume dries up as the rally cools off to form the flag. The share price has taken a breath for a week, then jumps up on a large volume spike.

The breakout occurs on the 22 June 2020 when the share price climbs rapidly. See chart 3 below. There is an earlier entry on Friday, 19th June 2020 where you can see the volume on the up-day is greater than the volume of all the days within the flag – however this is on a weak candle with the share price closing where it opened, some investors state that there needs to be a strong candle as well as volume to support the breakout.

HTF #3

This HTF appears weaker than the first two, which is often the case. In our research we’ve found that it’s rare for the third HTF to reach profit target – which we’ll cover later.

There is a channel, or flag, that is formed in the blue parallel lines, which comes from the highs of $0.044 down to $0.027. This retracement from the high is more than 50% of the price range from the recent breakout at $0.019. The chances of the HTF hitting the profit target drop dramatically when the flag retraces more than 50% of the recent gain, such as this blue HTF.

4. Profit Target

Once the HTF has broken out, the share prices normally move quickly. A 20-50% gain of the previous flagpole within the day is a common occurrence, especially with smaller capitalised companies on the ASX.

With this rapid increase in volatility it helps to have a profit target to aim for and use as the exit. Fortunately HTFs create rather reliable profit targets. The profit target is calculated from the breakout point, where you add 80% of the height of the flag pole to determine the sell level.

Using HTF #2 as an example, the blue flagpole is from $0.01 to $0.024 = $0.014. 80% of this flagpole is $0.011.

The breakout point is $0.0195 where the share price shoots up on 9 July 2020 on huge volume. This is shown at the pointy end of the triangle in the chart below. [Note that the ASX’s Centrepoint Trading created the extra number after the decimal point].

The profit target is the breakout point $0.0195 + 80% of the flagpole $0.011 = $0.0205, which works out as $0.03, or a roughly 50% rise in the share price from the breakout point. This is shown as the horizontal line in the chart below.

After the HTF breakout, the profit target was hit four (4) days later. Shown as the circle on the chart below. Notice that the share price went another whole flagpole higher and traded over $0.044, which was more than 100% over the breakout point less than two weeks after the breakout point.

5. Doubling your odds of a successful HTF trade

There is one extra research overlay which doubles the chances of the HTF hitting profit targets. From the research of HTFs we’ve conducted on the ASX over the last decade, we’ve found that HTFs of companies in the leading industries are twice as likely to hit their profit target than those in weaker industries.

Because HTFs are such a strong pattern and provide huge amounts of returns in short periods of time, we track the leading industries on Finer Market Points to help the performance of HTF trading.

For the latest updates on the ASX’s leading industries subscribe to Finer Market Points here.

All charts extracted from Iress.