Breakout in Out-of-Favor Retailer Could Provide Fast Profits

Once one of the hottest teen fashion retailers, Abercrombie & Fitch (NYSE: ANF) lost its luster with its fickle demographic. While investor dissatisfaction has grown in recent years, the company has done little to remedy the situation. 

On Tuesday, it announced that it will split the offices of chairman and chief executive and eliminate its "poison pill," a shareholder rights plan that triggers the issuance of new shares that would dilute the position of any activist investor with a large enough holding. The company also announced that it added three new members to its board of directors.

These changes were partially forced by activist investors, and some investors were quick to point out that the company is now more acquirable. Investors applauded the moves, and shares jumped nearly 5% on Tuesday.

Despite a pullback on Wednesday along with the broader market, I think ANF is constructively positioned for a further move higher in the near term.

Because of its volatility, ANF is closely watched on a day-to-day basis by the active trading crowd, as well as plenty of hedge funds. Thus, from a trading perspective, when the stock makes a technically significant move, it tends to continue in that direction for some time.

And with the next earnings report not scheduled until Feb. 26, we should have plenty of time for a swing trading setup.

On its weekly chart, ANF has key support in the $29-$31 area, which also acts as the neckline of a multiyear head-and-shoulders pattern that is still in play. While a break below this support would be blatantly bearish, until such time, through this multiyear lens, the stock still stands a chance to get its act together. 

ANF Stock Chart - Weekly

Zooming in closer, the daily chart below reveals a line in the sand near the $38 mark that has acted as good resistance since August of last year.

ANF Stock Chart - Daily

Looked at another way, ever since ANF dropped off a cliff in August, it has been stuck in a trading range, which more and more looks like a multi-month basing pattern that could eventually lead to an upside swing.

On Jan. 10, a huge one-day move brought the stock right up to $38 resistance, but it then quickly settled back into a consolidation phase. The consolidation phase took the shape of a bull flag pattern, which held above its 50-day moving average as support and saw a confirmed breakout on Tuesday.

While Tuesday's rally did not pierce the multi-month resistance point, it was the second bullish breakout in a month, something that the stock has not seen in quite some time.  

Recommended Trade Setup:

-- Buy ANF on a break above $36
-- Set stop-loss at $35
-- Set initial price target at $38 for a potential 6% gain in four weeks

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