Abercrombie & Fitch Co. (NYSE: ANF)

It is very common for me to discuss Head and Shoulders (H&S) patterns in my articles. An H&S pattern is a reversal pattern that forms after an uptrend. A textbook H&S pattern starts to form when a stock rallies to a point and then pulls back to a particular level (shoulder #1). Next, the stock will rally again, but this time to a higher peak (head) than the previous shoulder. After forming the head, the stock will pull back to the same support as the first shoulder did. Finally, the stock rallies a 3rd time, but not as high as the head (shoulder #2). The level that has been created by all 3 of the pullbacks is simply a support level referred to as the “neckline”. The formation of an H&S pattern warns of a potential reversal of the uptrend into a possible downtrend. As with any chart pattern, a trader will usually not want to act on the pattern until the stock “confirms” the pattern. Confirmation is the break of the key level that has been created by the pattern. In the case of an H&S, confirmation would be when the stock breaks the neckline (support).

H&S patterns can also form upside-down and the pattern would be called an Inverse Head and Shoulders. It too is considered a reversal pattern after a downtrend, but it can also be a continuation pattern in an uptrend. The neckline would be a resistance rather than a support.

To see such an Inverse H&S pattern potentially being formed, please take a look at the 1-year chart of ANF (Abercrombie & Fitch, Co.) below with my added notations:
After trading mostly sideways for the last (8) months ANF has formed what appears to be an Inverse H&S (blue). I have noted the head (H) and the shoulders (S) to make the pattern more visible. (If it helps to visualize, imagine this pattern flipped upside down and you would have a regular H&S pattern.) ANF's “neckline” resistance is at the $52 level (red). ANF would confirm the pattern by breaking up through the $52 resistance, and if it does, the stock should be moving higher from there.
Keep in mind that simple is usually better. Had I never pointed out this Inverse H&S pattern, one would still think this stock is moving higher simply if it broke through the $52 resistance level. In short, whether you noticed the pattern or not, the trade would still be the same: On the break above the key $52 level.

The Tale of the Tape: While moving sideways ANF seems to have formed an Inverse Head & Shoulders pattern. A long trade should be entered on a breakout above the $52 level with a stop placed under that level.
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