Behind the Trusty Bear Signal That's Sounding on ANF

Abercrombie & Fitch Co. (NYSE:ANF) stock hit a 22-month low of $13.58 on Sept. 3, on mounting U.S.-China trade worries. The retail shares rallied off this level, but are now sounding a technical signal that's preceded periods of weakness before. And with implied volatilities at historically low levels, it could be time to buy puts to bet on ANF's next leg lower.

Specifically, the stock is trading within one standard deviation of its 80-day moving average after a significant period below it, defined for this study as having trading south of the trendline 60% of the time in the past two months, and in eight of the last 10 trading days. There have been three similar signals since 2016, according to Schaeffer's Senior Quantitative Analyst Rocky White, and ANF was down 9%, on average, one month out, with not a single return positive.

A round of short selling could create headwinds for the shares, too. A number of shorts cashed out during Abercrombie & Fitch's slide to new lows, with short interest falling 19.2% over the Aug. 1-Sept. 1 reporting periods, to 11.38 million shares -- the fewest since October 2013. ANF's inability to capitalize on this burst of buying power speaks to its underlying weakness, and puts the stock at risk for bigger losses should new bears pile on.

Given the equity's dismal 22% year-to-date deficit -- down 2.1% today at $15.56 following dismal consumer confidence data -- analysts are overwhelming skeptical of ANF, with all 13 in coverage maintaining a "hold" or worse rating. However, the average 12-month price target of $17.69 is a nearly 14% premium to current levels, meaning there's room for price-target cuts to come through -- which could spark more selling.

It's an attractive time to buy options premium on ANF, too. The stock's Schaeffer's Volatility Index (SVI) of 49% ranks in the 17th annual percentile, meaning short-term options have been cheaper, from an implied volatility standpoint, just 17% of the time over the past year.