American Electric Power (AEP) has made a recovery rally the past three months, but it might be time to reduce exposure and wait for a better buying opportunity in the weeks ahead. Let's check our charts and indicators for some guidance.
In this daily bar chart of AEP, below, we can see a decline from July at around $71 to an early December low at $58. From early December AEP has recovered to $67 but it has recently pulled back. AEP is still above a flattish 200-day moving average line and above a rising 50-day moving average, but it won't take much of a decline to close back below these math-driven indicators.
The On-Balance-Volume (OBV) is interesting, in that it only declined slightly from September through November when prices peaked in early July. This resilience in the OBV line tells me that most of the investors in AEP stayed with their long positions even as prices declined. The OBV line has improved to a new high over the past three months, even though the price of AEP is still well off its July zenith. Prices made a high in December and then a higher high in February/March, but the momentum study in the lower panel made a lower high or a bearish divergence.
In this three-year weekly chart of AEP, above, we can see that prices are above the flat 40-week moving average line, which is not exactly the strongest technical position. The volume of trading looks to be the slowest pace in the past two months -- and is not a strong endorsement for the rally. The weekly OBV line could be a double top, unless it breaks out to a new high. The Moving Average Convergence Divergence (MACD) oscillator just moved above the zero line for an outright go-long signal.
Bottom line: AEP has nearby support in the $64 to $62 area and it looks like it could be tested in the days and weeks ahead. A close below $63 could precipitate a deeper decline. Traders could reduce their long exposure to AEP here. A close below $63 should give us the opportunity to rebuy it at a better location.