During a strong trend, a stock will still spend some time in a consolidation period before the next run. Here's a chart pattern that can be found during a consolidation of a strong stock. By Greg Kuhn In most cases, when a stock skyrockets 40%, 50% or even 60% in just a few weeks, it's considered overextended and prone to a deep correction. This is true especially if the rally - often referred to as a climax run or parabolic spike - occurs at the end of an advance that developed over many months. Sometimes the situations could even be the beginning of an even larger advance, and often, such opportunities are forewarned by a particular chart pattern called the high, tight flag. The high, tight flag pattern is a rare formation characterized by its occurrence after an advance that takes a stock up approximately 100% to 120% in just four to eight weeks, less in some cases. Following such a run, the stock usually corrects in a tight, sideways pattern lasting anywhere from three to six weeks, retracing no more than 10% to 20% of the advance. Many stocks can rise another 100% or more after the formation. The high, tight flag pattern consolidates an advance that often occurs after a stock has established a substantial base. The stock typically spends time in a well-contained base formation lasting from many months to many years. Then, some important news event usually emerges to lift the stock out of its dormancy - for example, an exceptionally strong earnings surprise or perhaps word that a major investor is taking a large position in the stock. |
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