Apparel and accessories retailer Abercrombie & Fitch Co. (ANF) is set to report quarterly results before the opening bell on Wednesday, May 29. The stock opened Tuesday, May 28, testing its monthly pivot at $25.57 with its weekly risky level at $26.55, which could block a positive reaction to earnings. In addition, the weekly chart is negative.

Abercrombie shares closed Friday, May 24, at $24.61, up 22.7% year to date and in bull market territory at 61.1% above the Nov. 20 low of $15.28. The stock set its 52-week intraday high of $30.63 on May 3 and is in correction territory since then, down 19.7%.

Analysts expect Abercrombie to post earnings per share of 43 cents when the clothing retailer reports results Wednesday morning. The stock is overvalued with a P/E ratio of 20.86, but the dividend yield is reasonable at 3.25%, according to Macrotrends. The bulls say that the retailer's strategy turnaround story is working as margins are expanding. This trend is expected to continue through 2019.

The daily chart for Abercrombie

Daily chart showing the share price performance of Abercrombie & Fitch Co. (ANF)
Refinitiv XENITH

The daily chart for Abercrombie shows price gaps higher on positive reactions to earnings on Nov. 29 and March 6. This drove the stock to its 2019 high of $30.06 set on May 1. This bull market from the Nov. 20 low of $15.28 is thus a consolidation.

The horizontal lines are weekly and monthly pivots at $26.55 and $25.57, respectively, and if the price fails there, it would indicate downside risk to the 200-day simple moving average at $22.43. The quarterly risky level at $30.07 was tested at the May 3 high of $30.63 as an opportunity to reduce holdings.

The weekly chart for Abercrombie

Weekly chart showing the share price performance of Abercrombie & Fitch Co. (ANF)
Refinitiv XENITH

The weekly chart for Abercrombie is negative, with the stock below its five-week modified moving average of $26.24 and above its 200-week simple moving average, or "reversion to the mean," at $19.83. The 12 x 3 x 3 weekly slow stochastic reading is projected to end the week at 62.54, down from 75.36 on May 24. When the stock was at its May 3 high, this reading was 92.65, well above 90.00 as an "inflating parabolic bubble," and this bubble is popping,

Trading strategy: Buy Abercrombie shares on weakness to the 200-week simple moving average at $22.43 and reduce holdings on strength to the weekly risky level at $26.55 and the 50-day simple moving average at $26.89.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.