Specialty clothing retailer Abercrombie & Fitch (NYSE:ANF) pulled off a massive one-day rally Wednesday after the company exceeded estimates for the third quarter and raised its forecast for the year. One interesting note from the report was that international sales were up a very strong 37% in the third quarter, which likely sparked new enthusiasm for the stock.
ANF also left some clear marks on the charts, which can’t be ignored — both from a trading and an investing perspective.
A very simple look at Abercrombie’s daily chart highlights yesterday’s rally, which broke the most recent downtrend in the stock. The volume spike also is easily recognized; on Wednesday, ANF 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 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 the positive divergence between stochastics and price (green up-trend line), which is further supportive of Abercrombie’s rally. Additionally, this recent jump came after ANF 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 chart below 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 upside reversal such as the one in ANF yesterday often is a game-changer, at least for a trade, and this new upswing should continue for some time.
As a cautionary note: Should ANF reverse a good part of yesterday’s gains in the coming days, then this sudden bullish stand 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 likely. Some consolidation at this stage — followed by more orderly buying — is what the current setup seems to suggest.
Abercrombie & Fitch stock has a beta of 1.5, but at the same time, very little correlation to the S&P 500 index — 12-month and 24-month correlations stand at 0.33 and 0.44, respectively. In other words, ANF is a fairly volatile stock, yet directionally acts fairly independent of the broader market.
As such, 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 (NYSE:AEO) and Urban Outfitters (NASDAQ:URBN) remain in a strong uptrend since September 2011, which left a wide gap between their stock prices and that of ANF … hence, a potential mean-reversion trade might also be in play here.