Shares of aluminum maker Alcoa Inc (NYSE:AA) have been in a terrible decline since late 2014, with relentless selling that just a couple of weeks ago had the stock off about 55% since November.
While the general malaise in commodity-related stocks and the strong dollar continues, the price action in AA stock over the past couple of weeks has shown some promising signs that at least a near- to medium-term bottom may be in.
“Don’t fight the trend” or “don’t try to catch a falling knife” — these are truisms that most investors have heard of, and that many seasoned traders and investors (including myself) adhere to.
But a trend can change subtly or quickly. By keeping an eye on the bigger picture via sector charts and a multi-time-frame approach we can better detect whether we are trying to fight a trend or if a trend reversal is truly at hand.
If we first look at the multiyear weekly chart of the Materials SPDR (NYSEARCA:XLB), we note that the year-to-date correction has mean-reverted it back to the 2009 support line while the Relative Strength Index (RSI) at the bottom of the chart has reached oversold readings last seen in early 2009, just before the market bottomed. The year-to-date correction in the XLB ETF by late August measured just about 25%, which is a good median retracement for a sector.
Through that lens, it might have been deep enough.
The big unknown (and the juggernaut that could easily break the materials sector lower still) is the U.S. dollar. Should the dollar see another major surge in the next six to 12 months due to a variety of reasons, materials stocks like Alcoa will likely continue to face at least some headwind.
AA Stock Charts
On the weekly chart of AA stock, we see that two weeks ago, Alcoa shares flushed lower. However, after a strong intraweek bounce-back, the stock closed the week in the green. This resulted in a big bullish reversal bar, or bullish engulfing candle, and was followed/confirmed the next week with another up-week.
Momentum — as represented by the RSI and the MACD oscillators at the bottom of the chart — shows that Alcoa stock was clearly deeply oversold two weeks ago, and despite the bullish reversal, it remains oversold.
On the daily AA stock price chart, note that the bullish reversal from the weekly chart above on the daily chart has retraced Alcoa back up to its yellow 50-day moving average for the first time since May, which could now act as a first area of resistance before another push higher gets underway.
Also note the positive divergence between price and the RSI, where the RSI in late August made a higher low versus price, which flushed lower. This then led to the sharp bullish reversal — the type of stuff we want to see when a stock tries to build a better medium-term bottom.
Active investors could now look to buy AA stock on dips toward the $9 area over coming weeks for a move to the upside into year-end into the $11 area, which would also roughly coincide with the blue 100-day moving average.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
