Casual apparel and accessories retailer Abercrombie & Fitch Co. (ANF) reported quarterly results before the opening bell on Thursday, Aug. 29. The stock gapped lower at the open despite the retailer extending its winning of beating analysts' earnings per share (EPS) estimates to nine consecutive quarters.
The stock ended August at $14.82, down 27.1% year to date and in bear market territory down 52.3% from its May 3 high of $30.63. The stock set its 2019 low of $14.19 on Aug. 29. In the longer term, the stock set its all-time intraday high of $85.77 in October 2007 and crashed by 89% to its low of $8.81 during the week of July 14, 2017.
Abercrombie stock slumped after earnings as it projected that tariffs would hurt the company for the remainder of 2019. The company plans to close three of its flagship stores in New York's SoHo; Fukuoka, Japan; and Milan, Italy. The retailer is also reducing its dealings with China to reduce the adverse effects of the increasing tariffs.
The daily chart for Abercrombie
The daily chart for Abercrombie shows price gaps higher on positive reactions to earnings on Nov. 29 and March 6, which drove the stock to its May 3 high of $30.63. Then came the earnings on May 29 and Aug. 29, when price gaps lower occurred. This decline led to the formation of a "death cross" on July 8, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices would follow. The horizontal line is the semiannual pivot at $14.78, which was a magnet after earnings on Aug. 29 and Aug. 30.
The weekly chart for Abercrombie
The weekly chart for Abercrombie is negative but oversold, with the stock below its five-week modified moving average of $16.80 and below its 200-week simple moving average, or "reversion to the mean," at $19.56. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 19.50, which is below the oversold threshold of 20.00. 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 has popped by more than 50%.
Trading strategy: Buy Abercrombie shares on weakness to the July 2017 low of $8.81 and reduce holdings on strength to the "reversion to the mean" at $19.56.
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 annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on July 31. The quarterly level was changed at the end of June.
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.