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Ian Woodward April, 2001

A Review of the Key Elements of High Tight Flags

High Tight Flags are usually rare beasts. Only a couple each year go on to be really long
term winners. However, HTF’s also turn up two a penny when:

a) There has been a long spell of drought in the Nasdaq small cap stocks
b) There is excessive froth in the market as we witnessed in the March through June 1996 timeframe, and then of course more recently from October 1999 to March 2000.

There are always two phases to HTF’s:

1. First Leg:

a. A strong breakout from a long, long base
b. Flagpole is always >50% rise in price; invariably 100% up
c. The Flag then forms over a two to three week period
d. The Flag droops down slightly….<10 to 15% from the high
e. Great leading stocks will rise above the 4 Day MA and correct back to the 9 Day MA

One usually misses the first run up the Flagpole, but wait for the

2. Second Leg:

a. The second leg is almost equally rewarding
b. Expect at least 70% of the previous rise for the second leg
c. At the bottom of the flag, the volume goes quiet – this is the key
d. Buy on the first signs of Volume and Price increase AFTER “quiet”

Technical Analysis:

a. Be patient; don’t buy on the “greasy” flag pole
b. Wait for the drooping flag to form over 1 to 2 weeks
c. Watch for the volume to go “quiet” at the bottom of the Flag
d. Buy when the price rises off the bottom with good volume
e. Always use the 4, 9, and 17 Day MA’s with a three month chart
f. Buy when the 4 Day MA comes up through the 9 Day MA and/or
g. Buy when the 4 and the 9 Day MA’s come up through the 17 Day MA

Now let’s look at the status of Alliance Gaming (ALLY) as it has completed Phase 1 and about to enter into Phase 2.

A Classic High Tight Flag in the making – If ever I saw one!

1st Phase:

• $12 to $20 (between friends) = $8 up
• Stock rises above the 4 Day MA, shows substantial strength
• Stock bounces off the 9 day MA – very unusual (usually the 17 day MA); strong
• Correction was <15%, which implies strong support, and confirms a “tight” stock
• Danger was that the Industry Group was fat with profits, and big cousin stocks sold off
the last two days – SLOT and IGT.• Unfortunately, this caused the Gaming Group Index to droop down to its 200-Day
Moving Average, yesterday. It broke a strong pattern and set up for Group Index
breakout to a new high.
• Fortunately, both are being bought today, which may suggest another leg for the
Industry Group. At least it implies that the Group may have a chance to go again as a
whole.
• Sometimes, strong leaders like ALLY can swim upstream while the rest of the herd are
heading south, but such mavericks are very rare and need the weight of the group
moving with them to achieve their full SHORT-TERM potential.

2nd Phase:

• First major hurdle is to get past recent high at $20ish – if not, watch for pull back
• Assuming it breaks through to the top side the minimum upside move is 70% of $8,
which suggests $5.50 added to the low of $17.25 should put us at $23ish minimum.
• Thank heavens for small mercies with a strong one-day Market Rally last week. It was
getting to the point where there were no places to hide. Retail – Apparel/Shoe; Bldgs
– Residential/Commercial and Health – Outpnt/Home Care were the only places to
make money, besides Gaming, but even these were being buffeted.

Then come the tough decisions on what to do:

Short-term players:

1. Buy the rumor sell the news, before or after the EPS Report?
2. Will the EPS Report exceed the street expectations of 60c per share? If it meets it,
expect a sell off. If it exceeds it and the market is strong, expect a stronger move and
then a sell off.
3. The Conference call with the tone of the outlook can make a difference

Long Term Players:

1. Ignore all this, but it might help you some day.
2. If the stock goes into a climax run of a further 30% or greater, the prudent play is to
take some off the table and come back in when the dust settles.

For all Players:

1. Fundamentals are key to deciding “What” to buy. If they remain strong, an
intermediate to long term buy and hold may prove best in the long run. With the wild
rotation out of “Profit Fat” groups, watch out that you don’t give it all up.
2. The Technicals relating to Fear and Greed between Bulls and Bears will usually tell
you “When” to buy and sell. The strongest stocks have both Value and Growth buyers
in the stock. Short-term Momentum types take small rides and in the bigger scheme of
things don’t affect the stocks progression over the intermediate and long term.
However, when the big institutions decide to vacate the premises, the individual
investor gets trampled on. The watchword is “Rotation, Rotation, Rotation”.

© Ian R. Woodward April, 2001