Aeropostale (ARO) Upside Gap-Fill Potential


Aeropostale Inc (NYSE: ARO) is a specialty retailer of casual clothing and accessories for teenagers and children.  The company currently operates about 885 stores in the U.S. and a few dozen in Canada.

While this is a stock I often keep on my screens, its recent slowdown of the sharp price decline coupled with a short-term price breakout makes it noteworthy this time around.  Let’s walk through the charts in multiple time frames:

On the three year weekly chart we see how Aeropostale Inc (NYSE: ARO) broke out of a longer-term wedge in late May, at which point the price action to the downside accelerated.    


In the latter part of May, after two gap-downs the downward spiral finally started to slow down, although still working towards lower prices.  From this late May to late June period we note a clear divergence between price and the RSI Wilder momentum oscillator.  Such divergence signals are what I find the RSI to be most useful for as it indicates sellers are starting to leave the scene, giving way for first opportunistic buyers to arrive.   


At $18.34 as of Friday’s close, Aeropostale Inc (NYSE: ARO) currently trades almost 30% below its 200 day simple moving average (red line) and some near-term regression toward the mean is not such a far-fetched idea.  On the daily chart let’s first note the two gap-downs in May marked by the gray boxes. Second, on July 7th the stock broke up and out of a downward sloping channel (blue lines), which coincides with that the late May to late June consolidation period discussed above.       


The trade I see setting up here is to go long the stock around the $18.30 level with a stop at $17.30 and a price target at the top of the lower gap, which is at $20.80.  In essence this trade setup is very similar to the one discussed on Friday July 8th on Research in Motion (NASDAQ: RIMM).

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