Bulkowski's Trade in Ann Taylor

Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved.

This article discusses a trade in Ann Taylor using a high and tight flag chart pattern. This is an actual trade made by Mr. Bulkowski.

Opening Position

The chart on the daily scale shows the buy side of a trade in Ann Taylor (ANN).

On July 25, 2009 I made a comment in my trading log about waiting (not wanting) to buy the stock. Why? Because earnings were due to come out on August 17. Buying within three weeks of an earnings announcement can be hazardous to your wealth. So I waited.

On July 30, the company announced that they would cut more jobs, but see a modest profit in the second quarter. That sounded promising, because I don't work for the company and didn't have to worry about losing my job.

From an investors' perspective, fewer jobs means lower overhead and higher profit, but also the risk that business will remain soft.

On August 5, Jefferies initiated coverage with a hold on the stock, and on the August 19th, UBS upgraded the stock.

Actual earnings arrived on August 21, which is also the same day as I bought.

Turning to the chart, you can see a high and tight flag begins on July 14 at a low price of 6.87 (point A). By August 7, the stock had climbed to a high of 13.55 (point B) for a gain of 97%, above the 90% threshold I set for high and tight flags.

The Ann flag does follow a down-sloping trend as in many flags, but it's not as tight as I've seen in other congestion regions.

After nearly doubling in price in about 3 weeks, the stock moved sideways in the flag portion of the high and tight flag. I bought as price broke out upward from the consolidation region, receiving a fill at 12.36.

High and Tight Flag Explained

In a high and tight flag, the stock must double (or nearly so) in 2 months or less. Then the stock moves sideways in a congestion region called the flag.

The flag can be a loose collection of prices (worst) or a nice tight sideways movement (best). I write "Best" and "Worst" based on tests of the flag chart pattern. Breakouts from a tight congestion zone tend to propel price farther than from breakouts from a loose congestion area.

In a hight and tight flag, the "flag" often doesn't look like a traditional flag at all. Most of the time, the price movement is irregularly shaped, a loose collection of sideways price movement, not resembling a flag or pennant.

After price doubles, look for price to pause in its ascent. That pause will be the flag. For more information on high and tight flags, visit the link.

Closing Position

The next chart shows the sale of my stake in Ann Taylor. Arguably, it doesn't matter at what price you buy the stock. What matters is the price at which you sell.

Looking back at the historical price trend of Ann Taylor revealed that it trends downward in May six out of nine times since 2001. Coupled with the saying, "trade till May and then go away," and believing that the general market was heading into trouble, I decided to sell, which the chart shows.

As you can see, the sharp down move in the few days before the sale lead me to believe the stocks was heading lower, but the tall price swings in April should have been a warning to try and exit near the top of the channel instead of the bottom.

The day I made my sell decision was the day price punctured an up-sloping channel, heading down. I sold the next day, missing the yearly high by two days.

After I sold, the stock continued its large price swings, but eventually followed the general market lower.

I bought the stock at 12.36 and sold it at 22.06 for a net gain of 78% in less than 9 months.

-- Thomas Bulkowski

Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved. Everyone must pay for their sins. If you have already paid, then disregard this notice.