Thursday, December 12, 2013

ANF: "It's different this time!"

Update 3/20/2014: I've closed my position for a loss, which was greater than it needed to be because of loopholes in my exit rules, which I'm in the process of fixing. I don't intend to roll ANF forward into a new position.

ANF gapped up on Jan. 10, meandered between the exit-signal points and then rose sharply on Feb. 26. Although the Elliott wave count remains bearish long-term, the position is clearly a non-performer over the nearer term.

The stock rose 24.1% ovefr the 94-day life of the position, or 93.6% annualized. My long options spreads had a -47.6% yield on risk, or a loss of 184.9% annualized.

Click on chart to enlarge.
ANF 3 years 3-day bars

Update 12/16/2013: I opened a bear position in ANF, as it continued to show downside momentum. Because of the low implied volatility, I structurd it as bear put spread, bought with a debit and expiring in May.

Leverage is 3:1, and the maximum potential yield on risk is 98%. 

I was savaged in October by a bear play on Abercrombie & Fitch Co. (ANF). The stock rose by 11.1% and my highly leveraged options spreads lost six times that amount in 23 days. (See "ANF: How far can it tumble?" for my analysis at that time).

"It's different this time" is a refrain heard often from three-time divorcees who have fallen in love again and Las Vegas gamblers putting yet another coin in the slot machine for the hundredth time that night.

The markets are one of the few venues where "It's different this time" rings true. The one eternal truth of trading is that prices move, and each day brings a fresh chart up on the screen, even if the symbol is the same.

My Elliott wave count for ANF back then tracked the internals of what, on today's new chart, is labeled wave 3 {+2} down from $55.23 on May 3.

I entered the position at what proved to be the bottom of wave B {-1} and exited near the top of wave C {-1}. Had I used the chart more deftly as part of my exit strategies, I would have mitigated my loss significantly.

Lesson learned. I'm in the process of formulating exit rules that will make the Elliott wave count the primary decision tool for exits, while retaining the Turtle Trading levels as alerts that decision time has arrived.

Click on chart to englarge
ANF 3 years 2-day bars (left), 107 days 1-hour bars
Wave C {-1} and its parent, wave 4, peaked at $38.54 on Nov. 5 and quickly began a race to the downside. Wednesday's confirmed break below the 20-day price channel is part of that decline.

The whole movement is part of a massive correction from the Oct. 5, 2007 peak of $85.77. ANF is now in wave C {+3} of that correction, and more specifically, in the daughter wave 3 {+2}, which generally the most momentum of all the primary components of a C wave.

Focusing in, wave 3 to the downside within wave 1 {+1} of 3 {+2} ended Sept. 3 at $34.64, giving way to a wave 4 correction, a flat consisting of three waves.

ANF is now in wave 5, and I count it as being within the daughter wave 3 {-1} to the downside.

By doctrine, wave 3 {-1} can be expected to exceed the end of wave 1 {-1}, which is $32.41. It can go well below that level -- there are no limits in Elliott wave theory -- but #32.41 is the minimum expectation.

A detailed count of the last 10 days (see the chart below) shows wave 3{-1} in its final movement to the downside, wave 5 {-1}, suggesting that the parent wave 5 {-1} may be a low momentum move.

Click on chart to englarge
ANF 10-day chart 5-minute bars

The minimum goal is a bare 2.3% below today's opening price and the potential drop is much more than that. If I'm a cautious trader, I'll wait for $32.41 to be pierced. If I'm a risk-taker, I'll open a position now and count on nimble trading to exit without a serious loss.

Abercrombie, headquartered in New Albany, Ohio, sells casual sportswear and accessories for men (mainly men with six-pack abs) and women (mainly fun-loving with a touch of athletic glamor) through more than a thousand stores globally under its corporate name and the names Hollister, which uses "Dudes" and "Bettys" rather than the staid "Men" and "Women" on its website, and Gilly Hicks, which focuses on undergarments for women.

Hollister accounts for 42% of the stock's market capitalization, and Aberrombie & Fitch stores for an additional 28%.

Analysts are somewhat negative and Abercrombie's prospects, coming down collectively at a negative 30% enthusiasm rating. Zacks ranks it as a strong sell.

The company's financials are far from awful. It reports return on equity of 13%, with long-term debt quite low at 11% of equity.

Earnings tend to peak in the 4th quarter, which includes the winter holiday shopping season. That quarter in 2012 came in nearly four times higher than its year-ago counterpart, which in turn was far below a year earlier. For Abercrombie, 2011 was a grim year, 2012 showed some recovery, and 2013 is running lower than 2012, although the 4th quarter results for this year have not been reported.

The company has had two losing quarters in the past three years, the 1st quarters of 2012 and 2013. It has surprised to the downside five times in the last 12 quarters, the remainder being upside surprises.
The most recent downside surprise was two quarters ago.

The current earnings yield, annualized at today's prices, is 8.42%, with 2.46% of that paid out as a dividend. The company retains 71% of its earnings.

The stock is priced at 12 times earnings, higher than 97% of other clothing retailers, but the price is at a discount to sales. It takes 58 cents in shares to control a dollar in sales.

ANF on average trades 3 million shares a day and supports a wide selection of options strike prices, with open interest near the money running to three and four figures. The front-month at-the-money bid/as spread on puts is 3.3%.

Implied volatility stands at 40% and has been falling steadily from 44% on Dec. 5. Volatility stands at the 21st percentile and so is on the low side, implying that positions structured as options spreads bought for a debit have the greatest chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $28.74 and $36.26 over the next month, for a potential gain or loss of 11.6%, and between $30.69 and $34.31 over the next week.

Contracts are trading slowly today, with calls at 30% of their five-day average volume and puts at 25% of average.

Abercrombie & Fitch next publishes earnings on Feb. 18. The stock goes ex-dividend in February for a quarterly payout of 20 cents.

Decision for my account: I'm going to wait a day or so before opening a bear position in ANF. I'll play the cautious trader and see if it does indeed move convincingly below the $32.41 resistance level discussed in my chart talk above. The near-term 10-day chart is dispositive for that decision.

I'll structure any position as long bear call spreads, bought for a debit and expiring in May.


My shorter-term 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. The principal practitioner 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

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

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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