Abercrombie & Fitch (ANF) has been down on its luck for about five years. The stock has been in an immensely large downtrend, with relief rallies spawning at a frequent cadence along the way. However, I see a lot of promise in the chart of ANF. With mixed quarterly reports for retailers, and Abercrombie & Fitch reporting on November 20, the stock sets up to be one that could rally very hard into and beyond the report. Here's why.
Take a look at the picture below. If you read my article on the inverse and head and shoulders pattern, then the chart pattern should jump right out at you. Below is a daily chart of ANF, and the inverse head and shoulders pattern is even cleaner on the weekly chart. The reason why I'm not using the weekly chart is because there are a few key technical components to this chart that are only showing up on the daily chart.
Take a look at the rightmost candlestick. Today ANF tested both a long-term support/resistance line and its 50 day moving average. With the two occurring in the same spot on the chart, I am confident that there is ample support at about $21 going forward. Moreover, this appears to be there handle of a short-term cup and handle chart pattern, which is one of the most reliable charts when it comes to predicting the next move of a stock (almost always up!).
In addition, superimposed on the bottom portion of the picture is a trend-line of support for the relative strength indicator, or RSI. ANF has strong relative strength, which bodes well for gauging the momentum of the stock. Furthermore, this line of support held in today's trading session, which leads me to believe that, in the very-near-term, ANF has reached a bottom. But there's even more to the chart that makes me bullish. Look at the picture below.
It should be noted that this is the same six month period as the previous picture. The above picture also includes the Chaikin money flow index and the on balance volume. The latter indicators, when used in conjunction with the RSI and a chart pattern as reliable as that of the inverse head and shoulders, can produce some incredibly compelling buy-signals.
The Chaikin money flow index, or CMF, is essentially an indicator that tells retails investors where the big boys are spending their money. It measures the momentum of money entering or exiting the stock. When the indicator is above the 0 line (which is superimposed as a white, horizontal line in the picture above), the stock's momentum is with the bulls. Furthermore, the on balance volume is the indicator on the bottommost portion of the picture. This indicator is -- in a few words -- a way to measure the buying and selling pressure of a stock. It is a running total of positive and negative volume, adding volume on up days and subtracting volume on down days. When the on balance volume is trending in the same direction as the underlying stock, it gives a lot of confidence to direction of the current trend. Add it all up, and I think that, despite its long-winded downtrend, Abercrombie & Fitch makes a pretty bullish case for itself. I noticed a lot of call buying in the name over the last few days -- much higher than the options' open interests. I see support at the $20 level, and upside to about $24. If ANF can clear $24, I think that it is smooth sailing up to $26. Seeing as Abercrombie & Fitch reports earnings on November 20th (keep in mind that it is before the market opens), a conservative strategy would be to buy half your position before earnings and half after. Doing this prevents a portfolio meltdown if ANF reports bad numbers, and gives you some skin in the game if it beats estimates. |