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Short term
Trade view / 05 March 2014 at 9:39 GMT

Abercrombie now in better position to rally

Trader / TheSteadyTrader.com
United States

Background

Today, I would like to re-visit a stock that I pointed to a trade setup in on January 13 — clothing retailer Abercrombie & Fitch (ANF:xnys). At the time, the stock flashed an initial buy signal that for most never triggered, as the stock reversed lower over the ensuing days. As I said at the time: "So far, Abercrombie & Fitch has only seen a one-day bounce and thus has not had any time yet to show commitment to a new swing higher. Therefore, any quick bearish reversal at this point would call the bounce a one-day wonder and should stop traders out of the trade." That's how this business works, however, and sometimes a stock needs more than one try to break a resistance area or see follow-through buying/selling for a setup to succeed.

On Tuesday, the Credit Suisse analyst Christian Buss upgraded his rating on Abercrombie & Fitch from Neutral to Outperform, and raised the price target from USD 36 to USD 52. He reasoned his new price target with an understanding that the company is now focusing on a premium pricing strategy, which should help margins. This helped rally the stock and now puts it in a good spot for higher prices in the coming weeks.

The weekly chart of Abercrombie still looks roughly the same since mid-January, with the notable exception that the December 2013 bottoming process (red bubble on chart) has now been confirmed as an important higher low.

Abercrombie & Fitch Co
Source: Saxo Bank

On the daily chart, however, is where the stock has made significant progress and, in fact, has just about reached the upside profit target of the trade setup from January 13 for those who didn't stop themselves out of the trade. 

On February 26, Abercrombie rallied nicely after reporting earnings, which brought the stock to its 200-day simple moving average (red line). After consolidating for a few days, the stock on Tuesday, on the back of the aforementioned analyst upgrade, broke out of a technical bull flag formation and past its 200-day moving average. This now sets the stock up to close the big down-gap from last August.

Abercrombie & Fitch Co
Source: Saxo Bank

Management and risk description

Although Abercrombie is now in a solid position to move higher, the biggest risk to the trade is that the rally since the late February earnings announcement has gone a little too far too fast. If the stock were to fall back in the coming days and consolidate, it should not break below the bull flag, which is marked just below the 200-day moving average on the above chart.

Parameters

Entry: USD 41.50 or higher.

Stop: USD 39.80.

Target: USD 45.50.

Time horizon: 3 - 6 weeks.

 

Disclaimer:
Non-independent investment research
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