American Eagle Offers Weak Holiday Outlook; the Charts Guide the Trading Strategy

Buy American Eagle on weakness to the monthly value level at $12.08. This stock has been extremely volatile since 2007.
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Apparel and accessories retailer American Eagle Outfitters  (AEO) - Get Report reported disappointing earnings before the open on Wednesday. 

The Pittsburgh retailer matched earnings-per-share estimates but projected weak holiday sales at the mall. The company is heavily discounting merchandise to lure shoppers to the stores.

The stock traded as low as $13.78 at Wednesday’s open versus its year-to-date low of $13.66, set Sept. 4. The stock has been below its semiannual pivot at $16.96 since Sept. 16.

My call is to buy weakness to the monthly value level for December at $12.08.

AEO has had a volatile ride since it traded as high as $34.80 in January 2007. The stock slumped nearly 80% from this high to its November 2008 low of $6.98. 

Within this volatile range was a huge bull-market run. The stock traded as low as $10.23 in August 2017 and a year later nearly tripled to $29.88.

The volatility continued in 2019. The stock closed Tuesday at $15.12, down 22% year to date and in bear-market territory 38% below its May 3 high of $24.30. 

The stock is reasonably priced, with a p/e multiple of 9.87 and dividend yield of 3.62%, according to Macrotrends.

When a stock trades with such volatility, investors and traders must study the daily and weekly charts to capture the up-and-down moves.

The Daily Chart for American Eagle

Note that the stock trades below its 50-day and 200-day simple moving averages.

Note that the stock trades below its 50-day and 200-day simple moving averages.

Refinitiv XENITH

The daily chart for AEO shows the stock had been under the influence of a death cross when 2019 began. The chart shows that the 50-day simple moving average is below the 200-day simple moving average, favoring lower prices this year. The stock first tested its 200-day SMA when it was $22.36 on Jan. 28 as a selling opportunity. 

The stock ended 2018 at $19.33, which was an important input to my proprietary analytics. This resulted in an annual pivot at $19.19, which was a magnet until the stock rallied above it on Jan. 11. The stock has been below this risky level since June 5 on a negative reaction to earnings. 

The close of $16.90 on June 28 was another important input to my analytics. This resulted in a semiannual pivot for second-half 2019 at $16.96, which was a magnet between July 1 and Sept. 17, when it became a risky level. 

There’s a quarterly risky level out of play above the chart at $25.18. The value level for December is a buy level at $12.08.

The Weekly Chart for American Eagle

The stock is below its 'reversion to the mean.'

The stock is below its 'reversion to the mean.'

Courtesy of Refinitiv XENITH

The weekly chart for American Eagle is negative, with the stock below its five-week modified moving average of $15.26. It has been below its 200-week simple moving average, or reversion to the mean, at $17.62 since the week of Sept. 26. 

The 12x3x3 weekly slow stochastic reading is projected to end this week declining to 33.83 down from 39.84 on Dec. 6.

Trading Strategy: Buy weakness to its monthly value level at $12.08 and reduce holdings on strength to its semiannual and annual risky levels at $16.96 and $19.19, respectively.

Value levels and risky levels are based upon the past nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.

The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.

The quarterly level changes after the end of each quarter, so the close on Sept. 30 established the level for the fourth quarter.

The close on Nov. 29 established the monthly level for December.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share-price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.