The market today is not rife with bullish charts. As I mentioned yesterday, I would be very patient here if you aren't building a long-term position and wait for triggers. There were some decent big-drop, decent-recovery names at the open, but now we're just slowly fading and I don't think those bounce moves are the way to play the afternoon. The more push we get lower on opens, the less likely I see those bounce plays to work out for traders.
Ironically, I've been finding decent setups in the retail space. It isn't something I expected. Following Restoration Hardware (RH) yesterday, I'm also watching American Eagle Outfitters (AEO) this week. I'm most focused on the price pattern here. After a decent push from the May lows to the highs of last week, we've seen a retracement. The current setup is one of a textbook bull flag.
There are two possible plays here. First, one could buy a close over the resistance level of the bull flag. This is my preference, as you will catch a move of any break higher. The stock is low, right now $17.25, and I would expect some resistance at $17.75. The second approach is buying the break over $17.75. Some prefer this because two levels of resistance are broken and there should be additional upside ahead. The negative is your stop is often much further away from your entry. I do not want to see the Force Index turn bearish, nor the RSI to drop under 50. Those should both be moving higher when price breaks out of the flag.
One look at the weekly chart and the $17.75 level becomes more of the focus. While the short-term trades are nice, a bigger push should come from a weekly close over $17.75. After a strong move higher over the past year, we have seen a stronger channel form in 2015. Currently, we are consolidating the bullish move in 2015 with a solid cup and handle. A weekly close over resistance should provide for a minimum of 10% more upside, if not twice that. Secondary indicators like the RSI and Force Index both still sit in bullish territory, also consolidating strong runs. This puts them into the confirmation camp rather than a leading indicator. Therefore, my eye on those will be to watch for developing bearish divergences. A close under $16.75 negates the bullish setup, but I have my eyes on $20 here if we see a weekly close over $17.75.
Given the setup, I'm not a fan of bullish put spreads. If this pattern fails, we could reverse quickly, so I prefer some simply in-the-money calls here so as not to limit my upside while defining my risk.
Be patient out there. No reason not to today.