It seems drastic to wait for a 27% decline in American Eagle Outfitters (AEO) - Get Report , particularly because it may never come. But after Wednesday's action, where shares fell 11.6% in response to earnings, there has been some damage done to the charts.
The retail sector has been a case of the haves and the have nots. Some continue to do quite well, like Cramer's anointed WATCH group -- which consists of Walmart (WMT) - Get Report , Amazon (AMZN) - Get Report , Target (TGT) - Get Report , Costco (COST) - Get Report and Home Depot (HD) - Get Report .
The problem for the have nots, though? They are getting obliterated when they report disappointing results.
For American Eagle, the company actually beat on earnings and revenue estimates, with the latter growing 7.8% year-over-year and topping the $1 billion mark. Comps rose 2% and gross margins expanded slightly. Earnings guidance for next quarter was a little light compared to consensus expectations.
Still, a near-12% beating down to new 52-week lows seems a bit excessive. Let's look at the charts.
Trading American Eagle Stock
Many investors are looking at the quarter and guidance, and saying to themselves, "American Eagle stock does not deserve to be down this much or belong at 52-week lows."
For chart readers, though, we follow price and react to the stock's moves. In this case, the moves are not promising.
American Eagle stock is breaking below channel support (blue line), a formation that's been in place for more than a year now. When the stock broke down toward $14.50 a few weeks ago, it tested this channel support level before a strong bounce sent it higher.
However, shares were unable to reclaim the $17 level, a significant mark over the past few years. Further, the 61.8% retracement for the five-year range comes into play at $17.07. Failing to reclaim this area was a bearish development for AEO stock, even before Wednesday's thumping.
Bulls need to reclaim channel support or risk further losses moving forward. Otherwise, a test of $13 may be on the table. From there, it will be important to see if American Eagle stock can find its footing or if it continues to slide. While the retail sector tends to bottom near Labor Day and rally into the holidays, investors have to be open to other developments.
To keep it simple with AEO stock, bulls need to see it reclaim channel support. If it doesn't, $13 could be in the cards. If the selling becomes aggressive, $10 is the line in the sand -- and likely a great buying opportunity based on the past five years of price action.
This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.