Abercrombie & Fitch Set For Further Gains

Specialty clothing retailer Abercrombie & Fitch (ANF) yesterday had a massive one-day rally after the company raised its forecast for the year and also exceeded estimates for the third quarter.  One interesting note was that international sales were up a very strong 37% in the third quarter, which likely sparked new enthusiasm for the stock.

On the charts too the stock left some clear marks, which from both a trading as well as an investing perspective cannot be ignored:

A very simple look at the stock’s daily chart highlights yesterday’s rally, which broke the most recent down-trend in the stock.  The volume spike too is easily recognized; yesterday the stock traded 35.38 million shares, which compared to the average daily trading volume closer to the 3 million mark is a gigantic leap.

Looking at the same daily chart from above with a bit more of a technical twist reveals a few more interesting nuggets:

The 34% rally in Abercrombie & Fitch (ANF) also led the stock above its 50, 100, and even the 200 day simple moving average.  While some momentum oscillators such as RSI already call the stock overbought, others such as stochastics still point to further upside in the stock.  On the chart below note positive divergence between stochastics and price (green up-trend line), which is further supportive of the rally.  Additionally yesterday’s jump came after the stock put in a higher low in late October (versus its August low), which ended in a higher high after yesterday’s rally.

Even closer-up the below chart shows the kicker and gap signals very clearly.  The kicker signal/candle is simply the big one-day rally, which on the chart left the gap, denoted by the green shaded area on the chart.  A big up-side reversal such as the one in Abercrombie & Fitch (ANF) yesterday often is a game-changer at least for a trade and this new up-swing should continue for some time.

As a cautionary note; Should the stock reverse a good part of yesterday’s gains in the coming days, then this sudden bullish stands would likely be erased again.  Furthermore, a one-day 34% rally is hefty by any measure and an immediate continuation of this new trend is not the most likely scenario.  Some consolidation at this stage, followed by more orderly buying is what the current setup seems to suggest.

Abercrombie & Fitch (ANF)  has a beta of 1.50 versus the S&P 500 but at the same time very little correlation to the index;  12 month and 24 month correlations stand at 0.33 and 0.44 respectively.  In other words, Abercrombie & Fitch (ANF) is a fairly volatile stock, yet directionally acts fairly independent of the broader market.

As such for me, as I consider initiating a long position in the stock, it would not be a play on the broader market’s direction but rather a specific bullish setup for the stock itself

Lastly, the following chart shows how seriously the stock has diverged from some of its competitors over the past 12 months.  Stocks like American Eagle Outfitters (AEO) and Urban Outfitters (URBN) remain in a strong up-trend since September 2011, which left a wide gap between their stock prices and that of Abercrombie & Fitch (ANF).  A potential mean-reversion trade may hence also be in play here.

 

 

 

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