When it comes to reading charts, not too many things are simpler than a Rectangle pattern. Throughout the Today’s Big Stock newsletters, probably the most common pattern discussed is the Rectangle. I like these patterns because trading them is very simple, clear and straightforward. The latest Rectangle pattern in the long list I have highlighted would be that of Abercrombie & Fitch Company.
Abercrombie & Fitch Company, through its subsidiaries, is a specialty retailer that operates stores and direct-to-consumer operations selling casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products, and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids, and Hollister brands. In addition, the company operates stores and direct-to-consumer operations offering bras, underwear, personal care products, sleepwear and at-home products for women under the Gilly Hicks brand. A&F brands include Abercrombie & Fitch, Abercrombie Kids, Hollister and Gilly Hicks.
To review Abercrombie’ stock, please take a look at the 1-year chart of ANF (Abercrombie & Fitch Company) below with my added notations:
ANF has been trading within a small, sideways Rectangle for the last (2) months. Rectangle patterns form when a stock gets stuck bouncing between a horizontal support and resistance. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. What’s great about a Rectangle pattern is that it not only provides you with trading points of support & resistance, but it also gives clearly defined breakout & breakdown points. For ANF, the Rectangle pattern formed a $50 resistance (red) and a $45 support (green).
One other thing to notice: ANF’s inability to take part in the stock market’s most recent rally would lead me to believe that the stock is gearing up for a breakdown of the $45 support.
Chart patterns can also provide price targets. Simply take the height of the overall pattern and add or subtract that amount to or from the breakout or breakdown point to get the minimum price objective. For example, since the Rectangle pattern for ANF is $5 high ($50 – $45), ANF should climb to a minimum of $55 ($50 + $5) if it breaks above $50 or fall to $40 ($45 – $5) if the stock breaks below the $45 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: ANF has formed a very common chart pattern know as a Rectangle. This pattern shows clear breakout and breakdown points for a potential long or short position. The possible long positions on ANF would be either on a pullback to $45, or on a breakout above $50. The short opportunities would be at either $50 or on a breakdown below $45. With this type of pattern though, a lot of traders will wait for the break of either the $50 or $45 level before making a trade.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT