The American lifestyle clothing and accessories retailer, headquartered in the Southside Works Neighborhood of Pittsburgh, Pennsylvania, American Eagle Outfitters (NYSE: AEO) seem to be poised for a price surge as per its latest charts.
Bullish Indications
#1 Falling Wedge Pattern Breakout: As you can see from the daily chart, AEO was trading within a falling wedge pattern during the past several months. This is marked in the daily chart in purple color lines. A Falling Wedge Pattern is a bullish pattern. Once the stock breaks out from it, it has the potential to move further up. Currently, the stock has broken out of the falling wedge pattern, indicating bullishness.
Daily Chart – AEO
#2 MACD above Signal Line: The daily chart shows that the MACD line (blue color) is currently above the signal line (orange color). This is a possible bullish setup.
#3 Above MA: The stock is currently trading above its 50-day SMA.
This implies that the bulls are currently gaining an upper hand.
#4 Strong RSI: The reading of RSI is currently above 50, indicating possible bullishness.
#5 Bullish Stochastic: The %K line (blue color) is above the %D line (orange color) in the stochastic, indicating bullishness.
#6 Fibonacci Support: Usually, after an up-move, stocks typically retraces to any of the key Fibonacci levels before surging back again.
AEO has currently taken support at 38.2% Fibonacci support level as seen in the weekly chart. The stock is also trading above the 200-week SMA. So, this seems like a good area for the stock to bounce upwards.
Weekly Chart – AEO
#7 Bullish Stochastic: The %K line is currently above the %D line. The stochastic is also moving up from below 20. All this indicates possible bullishness.
#8 Flag Pattern: The weekly chart also shows that the stock has been forming a flag pattern (marked in purple color). A flag is a bullish pattern and a breakout from this pattern typically causes the stock to move higher. Currently, the stock has broken out of the flag pattern, indicating a possible bullish bias.
#9 Bullish RSI: The RSI is above 50 in the weekly chart as well, indicating a bullish bias.
#10 Broken Downtrend: The stock has currently broken out from the downtrend line, indicating a possible bullish bias.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, you can purchase the shares of AEO at the current price of $20.21.
TP: Our target prices are $25 and $32 in the next 4-6 months.
SL: To limit risk, place stop-loss at $18.80. Note that the stop loss is on a closing basis.
Our target potential upside is 24% to 58% in the next 4 to 6 months. For a risk of $1.41, our target rewards are $4.79 and $11.79. This is an almost 1:3 and 1:8 risk-reward trade.
In other words, this trade offers nearly 3x to 8x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down from the falling wedge pattern with a high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Happy Trading!
Tara