Title: Seizing the Opportunity: Investing in a Struggling Retail Giant Amidst Downturn
In the year 2023, Abercrombie & Fitch (ANF) was a retail powerhouse, but its stock has been on a sideways trajectory since hitting an all-time high of $196.99 on May 29. This downturn was further exacerbated this week, when the company's fiscal-year guidance missed expectations, casting a shadow over its robust holiday sales and demand. As a result, ANF took a 15.7% hit on Monday, its worst one-day drop since a 17% post-earnings plunge on August 28.
Contrarian traders, however, should keep a close eye on this situation. ANF's recent slide has caused its stock to test a historically bullish trendline - its 320-day moving average. According to Rocky White, Schaeffer's Senior Quantitative Analyst, this trendline has signaled bullish trends for Abercrombie & Fitch two out of the last three years. To qualify as a bullish trendline, ANF had to stay above the moving average for 80% of the time over the past two months and close above it in eight out of the last ten sessions, before dropping close to it.
Based on this trendline, ANF has shown a pattern of strong recovery. In the past, it has averaged a 10.3% return one month after touching this trendline, and finished higher both times. Considering its current closing price of $128.11, a similar recovery could help ANF trim its 14.1% year-to-date loss. If the stock's 50-day moving average crosses over its 200-day moving average, it will form a 'golden cross' bullish breakout pattern, another positive sign.
There are also other promising developments worth monitoring. The stock's nine-month trend could be considered an overcorrection, given its descending 14-day relative strength index (RSI) of 35, which is at its lowest level since early August and on the brink of 'oversold' territory. Shorts are currently celebrating the start of 2025, but the stock still has potential for a short-squeeze if it experiences a V-shaped recovery. Currently, short interest is down 9.5% in the latest reporting period, and yet, the 4.33 million shares sold short account for 8.8% of ANF's total available float.
Options could be a good way to capitalize on this potential surge. ANF's Schaeffer's Volatility Index (SVI) of 48% falls in the relatively low 9th percentile of the last 12 months. Moreover, its Schaeffer's Volatility Scorecard (SVS) is at 17 out of 100, making it an attractive candidate for premium selling.
In light of the historical bullish trendline, investors might see an opportunity to buy ANF's stocks, as the company typically experiences a significant return after touching this trendline. The current slide in ANF's stock prices has also led to a decrease in short interest, which could potentially result in a short-squeeze if the stock experiences a V-shaped recovery. Moreover, the low Schaeffer's Volatility Index (SVI) and Volatility Scorecard (SVS) make ANF an attractive option for premium selling in the markets.
