Charting Surging Stock Abercrombie and Fitch ANF into Weekly Resistance

Apr 18, 2011: 11:34 AM CST

Earlier, I mentioned that retailer Abercrombie & Fitch snuck its way onto the “Top 5 Most Extended Stocks from the 200d SMA” list and that it was worth checking out for more analysis.

Indeed, ANF is at a critical pivot or turning point on its weekly chart that will determine whether this strong power-rally continues… or as the chart suggests, takes a slight/small breather here into a critical weekly resistance level.

Let’s see the Weekly Chart first:

Cutting right to the point, the $70.00 per share level is the key “Bull/Bear” battle as the chart stands right now.

Why?

First, it’s a simple “Round Number”  level, and if you look closely, ANF has had difficultly popping through each of its major “round number” digits on the way up.

Look at the pullback from $40 per share in late 2009; from $50.00 per share in April 2010 (“Flash Crash” period); and just recently in 2011 at $60.

Of course, once buyers powered through these overhead levels, the stock burst higher impulsively each time, including the recent surge above $60.00 to $70.00.

Second, the $70.00 per share region was the Midpoint or “Value Area” (Congestion Area) of the peak or “Rounded Reversal” structure in 2007 into 2008.

We would call this a “Supply Area” and could see resistance because of that (buyers selling shares/distributing once they get back to ‘break-even,’ assuming they’ve remained holding long until present).

So the main idea is to watch the $70.00 level closely – with very aggressive traders considering a potential short-term retracement/reaction down from here (tight stop above) while traders who are long might want to view this area as a potential “take profits” target.

The calculus would change dramatically on a surge above $70.00 of course – so that’s why this level is important.

With that level in mind, let’s see the Daily Chart:

I mentioned earlier that Abercrombie took the #3 Most Extended Stock above its 200 day SMA – up 44% above its long-term average (at $47.50).

Doesn’t that big surge-up in early April just scream “Pull-back?”

Maybe – so let’s look for logical targets should buyers begin taking profits along with bears shorting into the $70.00 level.

The first or immediate target would be $65.00 which is the rising 20 day EMA (a logical target in a stock that’s overextended and rising) but under $65.00 sends us back to the critical pivot at $60 which is both the round-number and price resistance area along with the rising 20 week EMA (now at $57.00).

Besides, the momentum principle (described in Chapter 2 of the Trading Course), states that:

“New Price Highs along with New Momentum (and volume) Highs tend to precede new price highs yet to come after an initial pullback/retracement.”

This forms the foundation for Retracement Strategies, namely the “Impulse Buy” or many “Bull Flag” patterns you trade.

So, if the principle holds true, we can expect a pullback to be the next phase which could lead to a buying opportunity as the current retracement – which seems likely – finds support either at $65.00 or $60.00 (depending on what happens in the next week or so).

That would set us up for a re-challenge of $70.00 and then potential breakthrough.

See how this identical logic played out in ANF regarding the Price/Volume and Momentum Surge/Impulse in December 2010, the pullback into support (trendline) at the end of January 2011 which was the retracement buy-in that took us back to $60 for the eventual breakthrough/breakout in April.

Anyway – even if you don’t trade Abercrombie & Fitch, their stock chart does provide some interesting lessons in a powerfully trending stock, impulse set-ups/retracements, and of course breakouts (from round numbers) which many traders find difficult but rewarding.

Corey Rosenbloom, CMT
Afraid to Trade.com

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