Following a sharp 36% drop in less than three months, Abercrombie & Fitch (ANF) is forming what I consider a high-probability mean-reversion setup. Usually, I’m satisfied when one or two indicators provide confirmation. With ANF, however, we are seeing a rare event where a full suite of technical indicators are in agreement. This brings me to an essential point: no matter how robust a setup appears, it can always move against you. That is why disciplined risk management is the key to success, far more so than finding the “perfect” entry point. A closer inspection of the six-month daily chart reveals several technical signals pointing toward an imminent reversal. Interested in trades like these? My trading algorithm, “Maya,” brings rules-based structure and automated trade management to options traders. See it in action here . For this trade I am using three indicators to provide confirmation: Directional movement index (DMI) This indicator is comprised of three components: the DI+ (green line) representing bullish momentum, the DI– (red line) for bearish momentum, and the ADX (blue line), which quantifies trend strength. A clear downtrend is in play when the DI– is above the DI+. A potential reversal signal emerges when these lines begin to converge—with the DI+ rising as the DI– falls—signaling that the tide may be turning. This is precisely the dynamic unfolding on the ANF chart. We are seeing the DI+ creep higher while the DI– begins to fade, a classic sign that bearish pressure is waning and bullish momentum is starting to build. MACD (moving average convergence divergence) The MACD is a reliable reversal gauge, but the standard (12, 26, 9) settings can lag. I often favor a more sensitive (5, 13, 5) configuration for a quicker signal. On the ANF chart, this faster MACD line (blue) has just decisively crossed above its signal line (yellow). Among technicians, this type of bullish crossover is widely interpreted as a clear-cut reversal signal. RSI (relative strength index) Finally, the Relative Strength Index (RSI) is adding confluence to the trade. The indicator recently approached oversold levels (near 30) and is now reversing sharply to the upside, confirming that buying momentum is returning. The trade setup : ANF 74-75 bull call spread To capitalize on this technical setup, with ANF trading near $73.91, I am using a bull call spread. This is my preferred strategy as it offers a clearly defined risk and a fixed maximum payoff. The structure involves buying one call and simultaneously selling a higher-strike call, both with the same expiration. Specifically, I am targeting the 74-75 bull call spread. The maximum value of this spread is $1.00 (the $1 difference between the strikes). If we can execute this trade for a debit of approximately $0.50, we are risking $0.50 to make $0.50—a potential 100% return on risk. The objective is for ANF to finish at or above $75 by expiration. In concrete terms, a 50-contract position would risk $2,500 for a maximum potential gain of $2,500. This trade is highly scalable. For those with smaller accounts, the same setup can be executed with a single contract, risking just $50 for a potential $50 gain. This 100% return profile makes it an excellent way to practice the strategy with minimal capital. Here is my exact trade setup Buy $74 call, Nov. 21 expiry Sell $75 call, Nov. 21 expiry Cost: $50 Potential Profit: $50 -Nishant Pant Founder: Author: Mean Reversion Trading YouTube, Twitter: @TheMeanTrader DISCLOSURES: Nishant has an ANF Bull Call Spread expiring on Nov. 21. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
