When aluminum producer Alcoa (AA) kicked off this latest earnings season last Tuesday, Alcoa stock didn’t react much initially. However, over the ensuing days, AA shares have rallied more than 8% in a near-vertical manner (on a daily closing basis), and coupling that with its doubling since September 2013, Alcoa stock is getting increasingly overbought. For active investors, that means a potential play on the short side banking on some mean reversion.
Alcoa’s second quarter included a better-than-expected 12 cents in earnings per share, comparing favorably over a loss in the year-ago period, and while revenues of $5.8 billion were flat year-over-year, they did beat Wall Street expectations of $5.64 billion.
The stock popped another 88 basis points on the news, but on the daily chart it left behind a doji candle — a first sign of caution, particularly as it came on the back of good news and on a vertical slope.
Alcoa Stock Charts
Looking at a multiyear chart of AA stock stretching back to the 2009 lows, note that it had three major rally periods.
- The first, which came off the 2009 lows with 250% in 11 months, was the longest and steepest by far. However, this one came on extreme oversold levels also in the broader stock market.
- The next one off the 2010 lows lasted approximately seven months and moved the stock 90% higher.
- The most recent one, which came off the 2013 lows into present day, is currently going at a clip of nine months and 110%. At the same time, the relative strength index (RSI) is at overbought readings not seen in a very long time. A mean-reversion move to the downside seems likely sooner rather than later.
On the daily chart, note that AA stock in recent days blasted out of its year-to-date uptrending channel and that as a result, the stock is also increasingly removing itself from the medium-term moving averages — the 50-, 100- and 200-day moving averages (yellow, blue and red lines, respectively).
At this point, chasing Alcoa stock higher is a low-probability strategy for active investors. Rather, one would be wise to look out for any sort of bearish reversal days that confirm the current overbought readings on both the weekly and daily charts.
A mean-reversion move back toward the $14-$14.50 area should then be in the cards.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.