AEO Gives us 100% Options Trade

On Tuesday we added a long model portfolio position in the American Eagle Outfitters (AEO) September 11.00 calls, as our pattern work argued for a positive response to the next morning's earnings release.

We wrote: "The technical set-up as well as a 29% Street short position suggest that it will not take much to light a fuse under AEO."

The company reported better-than-expected earnings, and the stock ran up 12% the next session, giving us a more than 100% gain on our options.

The first chart below shows what AEO did after our call.

The second chart shows the bigger picture of the stock. What our technicals had told us was that the stock had been carving out a base-like accumulation pattern since mid-April, and had absorbed some intense downside volume capitulation spikes.

In addition, the Apr-Aug 2014 basing action had been unfolding above the prior major low at 10.00 back in September 2011, increasing the potential for a secondary double-bottom low.

We noted on Wednesday, with the stock trading at 12.49, to expect additional strength that projects into the 13.60/90 target zone.

The stock closed Friday at 13.46.

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