The popular provider of life insurance products and services in the United States, American Equity Investment Life Holding (NYSE: AEL) seems to be getting ready for a price bump as per the latest charts.
Bullish Move – Chart Indications
#1 Falling Wedge Breakout: As you can see from the daily chart of AEL, the stock had formed a falling wedge pattern during the past few months. This is marked with orange lines. The stock had then broken out of the falling wedge pattern after taking support at the bottom of the wedge. A falling wedge is a bullish pattern and a breakout from it implies that the stock may move higher in the short term.
#2 MACD above Signal Line: In the daily chart, the MACD line (light blue color) is currently above the MACD signal line (orange color) which is considered as a potential buy signal.
This indicates a possible bullish bias.
#4 Bullish Stochastic: The daily chart shows that the %K line (blue color) is currently above the %D line (orange color) in the stochastic. This indicates a bullish bias.
#5 Good Supports: There is a gap support nearby (marked as purple dotted lines). The price is also currently above both 50-day as well as 200-day SMA. The 50-day SMA has also crossed above the 200-day SMA.
#6 Flag Pattern Breakout: As seen from the weekly chart of AEL, the stock was in a strong uptrend, after which it started consolidating and was in a range. This is a classic flag pattern and is marked in the weekly chart in purple color. A flag is a continuation pattern. The stock has currently broken out of this flag pattern, indicating that it might continue its previous move, which is an upmove.
#7 Strong ADX: The weekly chart shows that ADX is strong. This is because the (+DI) is greater than (-DI), both ADX and (+DI) are above (-DI), and ADX has started rising from below both (+DI) and (-DI). This is a possible bullish setup.
#8 Strong Stochastic: The %K line is above the %D line in stochastic and is moving up, indicating possible bullishness.
However, there are also signs of a possible correction in the short-term due to the following reasons.
- The RSI in the daily chart is overbought and moving down.
- The CCI in the daily chart is moving down from above +100
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level is between $32.25 and $34.
Note: For those who prefer a quicker entry, you can buy half the intended quantity of shares of AEL at the current price of $35.94.
TP: Our target prices are $40 and $48 in the next 4-6 months.
SL: To limit risk, place a stop loss below $29.50. Note that the stop loss is on a closing basis.
Our target potential upside is 24% to 49% in the next 4-6 months.
- Entry at $32.25: For a risk of $2.75, our target rewards are $7.75 and $15.75. This is a nearly 1:3 and 1:6 risk-reward trade.
- Entry at $34: For a risk of $4.50, our target reward (TP#2) is $14. This is a nearly 1:3 risk-reward trade.
- Entry at $35.94: For a risk of $6.44, our target reward (TP#2) is $12.06. This is a nearly 1:2 risk-reward trade.
In other words, this trade offers 2x to 6x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down from the gap support and falling wedge pattern with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the energy sector.