A slow economy and high unemployment has weighed on retail companies this past year. Despite spurts of promising data, a rally in retail stocks could not materialize after several attempts.
One of the more beaten down companies is Abercrombie and Fitch (ANF), which lost half its market value from the October peak.
Despite looking stable in May (forming a cup with handle), weakness in the market and across the retail sector dragged ANF to new lows near $29. The stock appears stable once again and there are signs that a bottom may be near.
There are certainly plenty of headwinds to consider. Sales guidance has been weak and there’s been a shift by consumers to low-end apparel. But recent reports from retailers have been positive. GAP (GPS) and Ann Inc. (ANN) reported strong quarterly results, and a U.S. retail sales report beat expectations with a 0.8% advance in July.
The positive results from competitors and the better than expected retail data spurred a rally that took ANF from $28.64 to $36.25. Volume was also high during the rally, indicating conviction among buyers.
The shares are rapidly approaching the $38 resistance level (blue line). It will be interesting to see if the momentum gained over the past week will be enough to break this area.
In the near term, I expect $38 to contain the buying pressure. However, ANF took back the 50-day moving average (orange line) during this latest rally. Stocks that are above the 50-day moving average are often in bullish trends.
The shares will eventually break out past $38 so long as buyers can protect the 50-day moving average. The target after such a breakout is $45, or about an 18.5% advance.
Investors should consider taking half their position as ANF pulls back to the 50-day moving average. The second half can be taken as the shares break out past $38. Total gains on the trade should be near 20%. ANF also pays a 2.2% cash dividend.
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