American Eagle Outfitters, Inc. (AEO), a major player in specialty apparel retail, is set to deliver its latest earnings report this morning. Following a swift and impressive recovery that pivoted from the October lows, AEO now finds itself firmly lodged in near-term overbought territory. Looking at the daily chart, the Relative Strength Index (RSI, at bottom of chart) has recently registered an aggressive reading of 80.50. Since any reading above 70 is traditionally viewed as overbought in the short term, this suggests the stock may be due for a pause or a cooling-off period right as the earnings catalyst hits.
The breakout test: Momentum vs Overextension
Crucially, technical analysis confirms that price recently surged through a major declining trendline that originated back in March of 2024, decisively confirming a bullish breakout. To ensure this new uptrend and momentum are maintained, the stock must hold ground above that critical former resistance, which now sits as support at $19.52.
With the breakout confirmed, this is where the opportunity lies: any sharp pullback from the current overbought levels toward the former trendline at $19.52 should be viewed as a near-term buying opportunity. A successful test and hold of this level would provide the necessary base for the price to press higher and test the next major level at $22.77.
The failure scenario
However, earnings events are high-volatility situations, and we must account for the downside risk. A failed breakout would occur if price closes back beneath the $19.52 trendline. In that scenario, the bullish structure is negated, and the momentum shifts rapidly to the bears. The next significant support level capable of cushioning the fall and potentially generating a bounce to retest the trendline is much lower, situated at $16.69. This is the key price point to watch if the $19.52 level fails to hold up against any post-earnings selling pressure.
