Apparel and accessories retailer American Eagle Outfitters, Inc. (AEO) 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. From the high to the low of $16.75 set on June 10, the bear market consolidation is 43.9%, with the stock beginning this week below its "reversion to the mean," now at $19.21.

Wall Street viewed last week's earnings report from the clothing retailer positively, and the stock tried to move higher. However, when the dust settled with forward guidance below estimates, the stock slipped lower.

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 America Eagle shows the bear market decline from the Aug. 22 high to the Dec. 24 low. The price gap lower on Aug. 29 was on a negative reaction to earnings. The earnings report on Dec. 11 was a factor leading to the Dec. 24 low. The stock has been below a "death cross" since Nov. 20, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices would follow. Failure from its 2019 high of $24.30 on May 3 caused by China tariffs prevented a "golden cross" from forming during the May decline.

The close of $19.33 on Dec. 31 was an important input to my proprietary analytics, which resulted in an annual value level of $19.19 and a semiannual pivot at $20.92. The close of $22.17 on March 29 was another input to my analytics, and its quarterly risky level remains at $25.27. Finally, the close of $17.40 on May 31 resulted in its monthly pivot at $16.41.

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 negative, with the stock below its five-week modified moving average of $19.20 and now below its 200-week simple moving average, or "reversion to the mean," at $17.51. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week declining to 18.95, down from 26.62 on June 7 and falling below the oversold threshold of 20.00.

Trading strategy: Buy American Eagle shares on weakness to the monthly value level at $16.41 and reduce holdings on strength to the annual and semiannual pivots at $19.19 and $20.92, respectively.

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 semiannual and annual levels remain in play. The weekly level changes each week; the monthly level changed at the end of each month. The quarterly level was changed at the end of March.

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.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

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