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Abercrombie and Fitch (ANF) - Assessing Reward to Risk of Pivoting Above 12

Recently, we saw Abercrombie and Fitch (ANF) fail to extend a bullish breakout, but instead stick around in a consolidation structure. In this consolidation structure, 12.00 has become a critical support. Last week, ANF came down to test this support and has so far held above it.

ANF Daily Chart

(click to enlarge)

Reversal? At the Crossroad:

- Looking at the daily chart, we see a market that is attempting to reverse the bearish trend coming into 2017.
- For a good four months, price has been consolidating. Then in May, it looks like price made a bullish breakout.
- However, price held under the 200-day simple moving average (SMA), which keeps the overall trend bearish.
- But then, price held above 100-day SMA. The fact it did that is a bullish signal. The fact that price held above it again in June makes the 100-day SMA and the 12.00 handle a critical support for the bullish reversal scenario.

Reward to Risk:
- Now, if we know 12.00 is a key support we should anticipate a bearish continuation if price breaks below 12.00. Or at least we should anticipate price to test the 2017 lows around 10.50-11.
- Let's also remain conservative with the bullish outlook because the prevailing trend was bearish. 
- On the daily chart we can see anticipatory resistance in the 16.50-17.40 area. Therefore, let's estimate the bullish target to be 17.00. However, we also need to consider 14.00 a key resistance. So let's take a look at the reward to risk for both targets.
- Now, let's say we set up a buy at 12.70 with a stop at 11.70. If the target is 14.00, the reward to risk is 1.30:1. Not very attractive.
- Then, there's the more aggressive outlook to 17.00, which offers a reward to risk of 4.30:1, which is attractive. If we average these R/Rs, the average is 2.8:1, which is acceptable in a bullish reversal outlook (imo, a bearish continuation or bullish continuation scenario can accept a lower R/R like 2:1).