1/31/12 Chart of the Day

[dc]T[/dc]his chart shows the bull flag in JAZZ that tested the previous swing high and failed. As this stock was nearing that previous pivot, I tweeted that it was breaking out, but not to chase it. Why? Because this day was pretty close to a worst-case scenario for a bull flag trader. This pattern failed around the previous high (the arrow), and closed down strongly. In an instrument that trades more cleanly (stock index, some commodities, large cap stocks) it probably makes sense to close out of the position on a day like this. In something a little bit more crazy like a pharma stock, your options are a bit more open. You are accepting gap risk, but it probably makes sense to work with a stop somewhere in the range of the red box. At the very least, acknowledge that this is not the hoped-for resolution of this pattern, and be alert to manage a bit more actively tomorrow.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.