Shares of the out-of-style trend-setter Abercrombie & Fitch Co. (ANF) have gained more than 32% since Nov. 17 when the company beat third quarter earnings and revenue estimates while guiding fourth quarter sales toward the high end of expectations. Covering short sellers – who had been banking on the troubled retailer continuing a nearly unbroken string of quarterly shortfalls – have provided most of the rocket fuel for this uptick.

Current technical positioning predicts that it is not the right time to jump in and buy the stock, despite the short-term euphoria and long-term buying signals. The rally posted a 52-week high in the upper teens but has now reached steep resistance at 18-month support, broken in October 2015. This formidable barrier should trigger a reversal in the coming days, generating a pullback that could fill the gap between $12 and $15 while offering a lower-risk buying opportunity. (See also: Abercrombie Sales Easily Top Wall St. Estimates; Shares Soar.)

ANF Long-Term Chart (1996 – 2017)

 

The company came public at a split-adjusted $11.44 in September 1996 and bottomed out at $6.25 five months later. The subsequent uptrend caught fire, peaking just above $50 in April 1999. The stock plunged into the new millennium, dropping more than 80% into the single digits before bottoming out in May 2000. Price action held within the boundaries of that sell swing for the next five years, ahead of a 2005 breakout that posted an all-time high at $85.77 in October 2007.

Abercrombie stock collapsed with world markets during the 2008 economic collapse but held above the deep 2000 low, finding support in the mid-teens.  A bounce into 2011 stalled just eight points below the prior peak, yielding a lower high, followed by a multi-wave decline that is still in force more than six years later. The sell-off broke the 2008 low in December 2016 but has now remounted that level, setting off a long-term 2B buying signal denoting the failure of bears to defend new resistance. (For more, see: Abercrombie Further Expands Footprint in the Middle East.)

ANF Short-Term Chart (2014 – 2017)

 

The stock broke five-year support in the upper $20s in November 2014 and tested that level in March 2016, triggering an aggressive reversal that cut through the 2008 low in December. Price action into November 2017 carved an inverse head and shoulders basing pattern, with the neckline roughly aligning with the breakdown level. This week's buying impulse has triggered a major breakout, establishing new support between $14.50 and $16. Even so, a pullback may undercut that price zone and fill the gap, shaking out early bulls ahead of even stronger upside.

The series of lower highs since 2012 has drawn a trendline with resistance near $19. That bearish placement substantially limits short-term upside while telling informed market players to keep their powder dry while waiting for a more advantageous entry price. In turn, this suggests that a pullback into the breakout gap will offer more favorable reward:risk ahead of continued testing in the upper teens or low $20s.

Trendline resistance also aligns with the .382 Fibonacci retracement level of the last selling wave, but that level is likely to break in the coming months, given heavy buying pressure off the deep low. The unfilled August 2016 gap between $18.50 and $23 looks like the logical upside target because it is also aligned with the 200-week exponential moving average (EMA), but a strong stomach may be required to profit from an exit at the top of that price zone.

On-balance volume (OBV) ended a long distribution wave in early 2015, with euphoric buying pressure into the May 2016 high eventually trapping hopeful shareholders. A similar technical scenario may be at hand, with long-side exposure benefiting from at least six months of positive price action before the hammer drops once again and declining sales trigger a fresh round of selling pressure. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Abercrombie & Fitch shares may have posted an intermediate bottom that lasts well into 2018, offering profitable positions for traders and market timers. Potential investors face a tougher task because it will take many months of buying pressure to end the major downtrend that started in 2011. (For additional reading, check out: Abercrombie, Gap Rebounds Spark Positive Trends in Apparel.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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