Update 10/30/2013: The answer to the question "How far can it tumble" turned out to be "Not very far". ANF moved above its 10-day price channel on Oct. 28 and confirmed the close signal the next day. I exited on the sixth day of the upward push.
That push produced a fairly nasty loss. The stock rose by 11.1% over the 23-day lifespan of the position, or by 175.5% annualized.
My options had a negative 60.6% yield on risk, or negative 961.8% annualized.
Update 10/7/2013: ANF closed well below its pre-market open of $35.01. It began a sideways trend on the 5-minute chart at shortly after 1 p.m. New York time, creating a range from $33.84 to $34.07, which it held until the closing bell.
I opened my position with nine minutes left to trade, structuring it as bear call spreads. Leverage is 4.1:1 with a maximum potential yield on risk at expiration of 51.5%. The position provides a 3.8% hedge of profitability at expiration above the entry price.
Abercrombie & Fitch Co. (ANF) broke below its 20-day price channel on Friday, but the chart suggests the downward momentum came as a final drop before a correction to the upside. Overall, however, I assess the chart as bearish.
The ANF chart shows the stock is in a downtrend and has been for some time. The Elliott wave count shows all the requirements are in place for the downtrend to reverse into a uptrend correction. The question this chart poses is, How much further can ANF tumble?
ANF peaked in its recovery from the Great Recession crash at $78.25 in on Sept. 18, 2011. From there, Elliott wave analysis shows that it completed five waves in a downtrend, to $28.64 on July 30, 2012.
|ANF 6 months, 1 day bars|
There is no rule that says how far the present wave 5 can go. The only rule is that wave 3 cannot be the shortest of the three downtrending waves. Wave 3 came in longer than wave 1, making wave 5 immaterial to meeting that rule.
What is certain is that when wave 5 is complete, it will be followed by a correction to the upside. Often these will stop near one of the more common Fibonacci retracement levels. In this case, such might be a 38.2% retracement to $41.90, 50% to $44.44, or 61.98% to $46.99. The rule requires that the correction remain below $55.23, the start of wave 1.
I'm unable to say for certain what the relation is between the two levels of trend that I've marked on the chart. The higher level, ending in wave (C), took 10 months to complete.
The present downtrend from that point has so far lasted five months, which isn't too far out of the timeframe. There is no rule saying that trends must take a similar amount of time to complete but, in general, they are at the least of the same order of magnitude.
In the lower right-and corner of the chart I've labeled the ultimate destination, wave I (roman numeral), which will be one or more levels still higher.
This is ANF's third bear signal since the present downtrend began last May. The two completed signals split, one successful and one not. The successful trade yielded 19.9% over 20 days, and the unsuccessful one lost 2.9% over 11 days.
The resulting 17% win/lose yield spread is quite high and in my mind overcomes any objections to the even odds.
Abercrombie & Fitch, headquartered in New Albany, Ohio, sells casual apparel in North America, Europe and East Asia.
Analysts are mildly pessimistic on the company, collectively coming down with a negative 8% enthusiasm index.
The current books aren't obviously troubled. Abercrombie reports at 15% return on equity with low debt amounting to 11% of equity.
But then there are those pesky earnings. Abercrombie, like most retailers, is tied to the end of the year holiday shopping season.
Earnings for the 4th quarter have been all over the map in the three years that I'm using for my analysis. The 2011 4th quarter came in above the corresponding quarter the year before, but in 2012 the 4th quarter earnings fell by 62% from a year earlier. In 2013, they rose to four times the a year earlier.
I would hate to be a fundamentals trader trying to forecast Abercrombie's future path.
Abercrombie has reported two losses in the past 12 quarters, the most recent being the 1st quarter of this year. On the happy side, the loss was less than that of the 1st quarter of 2012.
But the 2nd quarter, the most recent reported, came in 30% below its year-ago counterpart.
Earnings have surprised to the upside seven times in the last 12 quarters, and five times to the downside. The first two quarters of the present year were downside surprises.
Institutions own 95% of shares and the price is languishing; it takes 61 cents in shares to control a dollar in sales.
ANF on average trades 2.9 million shares a day with a wide selection of option strike prices spaced a dollar apart, with open interest running to three and four figures. The front-month at-the-money bid/ask spread on puts is low, at 2.1%.
Implied volatility stands at 43%, below the mid-point of the six-month range. It has been zig-zagging higher since Sept. 13, when it touched the low point of the range, 34%.
Options trading today is skewed heavily to the call side, with volume running more than double the five-day average. Puts are trading near average volume.
Abercrombie & Fitch next publishes earnings on Nov. 21. the stock goes ex-dividend in November for a quarterly payout yielding 2.37% annualized at today's prices.
Decision for my account: While I recognize the reversal potential of a fifth wave, the time relationships between the present downtrend and the uptrend that preceded it suggest to me that there is time for wave 5 to fall further.
I intend to open a bear position in ANF, structuring it as bear call spreads, if today's downward momentum continues into the last half hour of trading. I'll update this analysis with details of the trade if in fact it happens. If momentum fails to persist, I'll put ANF on the shelf for potential entry if very near term momentum resumes.
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
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