Shares of casual apparel retailer American Eagle Outfitters (AEO) on Wednesday rallied 12% as the company posted better-than-expected second-quarter results. The rally also was of technical significance, as it made a bullish statement that active investors can manage a trade around.
For Q2, American Eagle earnings came to 3 cents per share — well down from the dime per share earned in the year-ago period, but more than enough to beat Wall Street estimates for a breakeven quarter. Meanwhile, revenues dropped by more than 2% to $710.6 million, beating expectations for $690 million.
AEO’s declines came on a 7% drop in same-store sales and operating income that plunged 60%. At the same time, American Eagle’s costs rose 2% even though inventories dropped, and the company opened 20 new stores in the quarter.
The headlines frankly read miserable, but they did come in a little above expectations, and American Eagle’s Q3 earnings forecast of 17 to 19 cents per share perfectly straddled analyst estimates for 18 cents.
AEO stock responded by rallying 12% on a massive spike in volume.
I can’t help but marvel at how random any given’s stock reaction to earnings/outlook will be, but no matter. Wednesday’s technically sound move looks to have delivered some badly needed upside momentum to AEO.
AEO Stock Charts
On the below multiyear weekly chart, note that American Eagle’s momentum bottomed in October 2013 as per the RSI indicator, but price continued to fall until May of this year. After a few months of sideways movement, AEO stock slowly began to lift, and Wednesday’s rally took shares out of a downtrend that has been in place since early 2013.
On the daily chart, note the double bottom that AEO stock formed with its lows in May and July. Shares then moved higher on Monday and Tuesday of this week into the earnings announcement, and on Wednesday they broke past diagonal resistance dating back to May and even marginally pierced above their 200-day simple moving average (red line). Wednesday was the third time since May 2013 that AEO stock pushed into its 200-day SMA and the first time in a much longer time that the stock staged a bullish breakaway gap.
AEO now looks poised to continue this newly found ascent. Active investors could consider buying the stock around the $12.80 area with a next upside target at $14. Any break below Wednesday’s lows would call for a retest of the breakout area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.