Apparel and accessories retailer American Eagle Outfitters, Inc. (AEO) beat earnings per share (EPS) estimates for the sixth consecutive quarter on Sept. 4, but the stock gapped lower on disappointing guidance. The stock slumped 16% to its Sept. 4 low of $13.66. This proved to be a head fake, as the "power of the pivot" had the stock rebound to its semiannual pivot at $16.96 on Sept. 6.

The retailer's stock is consolidating a bull market rise of 192% from its low of $10.23 set during the week of Aug. 25, 2017, to its high of $29.88 set during the week of Aug. 24, 2018. This is also a consolidation of a longer-term bear market, as its all-time intraday high of $34.80 was set during the week of January 2007. The stock closed last week at $16.00, down 17.2% year to date and in bear market territory at 34.2% below its 2019 high of $24.30 set on May 3. American Eagle shares popped 17.1% from the post-earnings low of $13.66 set on Sept. 4.

Disappointing same-store sales were the reason for the negative earnings reaction. The problem was partly the result of reduced sales of warm weather apparel due to colder weather in May and the late start to the back-to-school season.

The daily chart for American Eagle

Daily chart showing the share price performance of American Eagle Outfitters, Inc. (AEO)
Refinitiv XENITH

The daily chart for American Eagle Outfitters shows a "death cross" that formed on Nov. 20, when the 50-day simple moving average (SMA) fell below the 200-day SMA to indicate that lower prices would follow. Failure from its 2019 high of $24.30 on May 3 was caused by China tariffs and prevented a "golden cross" from forming during the May decline. Investors could have sold the stock on tests of its 200-day SMA between March 28 at $22.37 and May 10 at $22.17.

The close of $19.33 on Dec. 31 was an important input to my proprietary analytics, which resulted in an annual pivot at $19.19. That level was a magnet between Jan. 2 and June 5. The June 28 close of $16.90 was another input that resulted in the semiannual pivot at $16.96. These levels correspond with the horizontal lines shown on the chart. The 50-day and 200-day SMAs are at $16.70 and $19.35, respectively.

The weekly chart for American Eagle

Weekly chart showing the share price performance of American Eagle Outfitters, Inc. (AEO)
Refinitiv XENITH

The weekly chart for American Eagle is neutral, with the stock below its five-week modified moving average of $16.63 and below its 200-week SMA, or "reversion to the mean," at $17.56, last tested during the week of Aug. 2. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 29.71, up from 21.68 on Aug. 30. The positive divergence is the rise above the oversold threshold of 20.00.

Trading strategy: Buy American Eagle Outfitters stock on weakness toward a test of the Sept. 4 low of $13.66, and reduce holdings on strength to its annual pivot at $19.19, as the semiannual pivot at $16.96 remains a magnet.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level changes at the end of each month, most recently on Aug. 30. The quarterly level was changed at the end of June.

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 shares 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 their time horizon expires.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.