A Breakaway Gap For Abercrombie

01/19/06 10:05:06 AM

by Arthur Hill

A breakaway gap and an ultimate divergence spell trouble for Abercrombie & Fitch.

Security: ANF
Position: Sell

There are three kinds of gaps: breakaway, continuation, and exhaustion. Breakaway gaps occur at the beginning of a trend to signal a sudden and sharp breakaway move, either up or down. These gaps act as a catalyst for further movement in the direction of the gap. Continuation gaps occur during a trend and simply affirm the current direction. Exhaustion gaps occur at the end of a trend and mark a trend reversal.

The year-end advance for Abercrombie & Fitch (ANF) began with breakaway gaps in early November 2005 (Figure 1). The October gap failed to hold and there was another support test around 45 (blue oval). In contrast, the November gaps held as the stock surged above 55. This surge set the bullish tone for the next few weeks and the stock worked its way higher throughout November and December.

FIGURE 1: ABERCROMBIE & FITCH. As long as the trendline and early January high hold, momentum appears bearish for ANF.

Graphic provided by: MetaStock.

Graphic provided by: MS Quotecenter.

ANF continued higher in early January but succumbed to sudden selling pressure over the last few days. This selling pressure produced a gap down on January 13, and it remains unfilled. As long as this gap is unfilled, I would consider it a breakaway gap and bearish. The first downside target would be the early November gap around 55.

Larry Williams' ultimate oscillator confirms weakness for this stock, cutting across three time frames. This example is set at 7, 14, and 28 days. The indicator moved to new highs in early November and held largely above 50 in November and December (green box). Even though the stock kept moving higher, the indicator formed lower highs and a negative divergence evolved. More recently, the indicator moved into negative territory twice, and this shows a breakdown in momentum. As long as the red trendline and early January high hold, I would consider momentum bearish for Abercrombie & Fitch.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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BREAKAWAY GAP

A Breakaway Gap For Abercrombie

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