American Eagle Outfitters, Inc. operates as a specialty retailer that provides clothing, accessories, and personal care products under the American Eagle Outfitters and Aerie brands. The company also provides jeans, and other apparel and accessories for men and women; and intimates, activewear, and swim collections, as well as personal care products for women.
Take a look at the 1-year chart of American (NYSE: AEO) below with the added notations:
A declining wedge has formed on the chart of AEO. A declining wedge price pattern is essentially a type of triangle formation in which the stock has formed a down trending resistance line and a down trending support level (red). These two trend lines converging on one another combine to form a declining wedge, which is considered a bullish pattern.
Confirmation of this pattern would occur if the stock broke through the down trending resistance.
The Tale of the Tape: AEO has formed a declining wedge pattern, which should lead to higher prices for the stock if the pattern confirms. A long trade could be entered on a break above the wedge resistance with a stop placed below that level.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT