Shares of aluminum producer Alcoa Inc (NYSE:AA) rallied nicely on Wednesday after the Federal Reserve’s dovish statement put the dollar under renewed pressure. Many materials and energy stocks pounced on their inverse relationship to the dollar, leaving some good-looking trade ideas ripe for the picking. And AA stock is one of them.
The recent broader-market rally off the February lows continues to be led by those pockets of stocks that were the most oversold, while former leaders and financials like banking stocks are lagging. All of this points to a high likelihood that this rally ultimately will fade and the intermediate-term bear trend will continue.
For the very near-term, however, traders may be able to generate a little more cash flow on the long side with calculated stabs.
Readers of this column likely know that I am not a fan of chasing assets higher or lower after already sharp moves, particularly if the intermediate-term trend remains lower. However, active investors must also be flexible enough to try quicker trades if and when the odds look favorable. That’s the setup I see in AA stock right now.
For some perspective, note that while Alcoa at its January lows was down by about 35% on the year, at present, AA stock is only lower by a little more than 1%. Peel back the time frames a little, though, and we see that Alcoa still is 25% lower over the past 52 weeks.
A simple rule for active investors and traders is to always look to your left; perspective in multiple time frames is crucial for good risk management.
AA Stock Charts
The multiyear weekly chart of Alcoa reveals that in the bigger sense, the January lows in AA stock came close to their 2009 lows, which just shows the pressure that the stock and the general commodities complex has been under since the summer of 2014.
While the intermediate-term trend remains lower (i.e., the stock is still making a series of lower highs on a multi-month basis), the red 200-week simple moving average may be a good upside target for the near-term should the recent squeeze continue and the U.S. dollar drop a little more in the near-term. The 200 week moving average currently resides around the $11 area.
On the daily chart, note that AA stock in early March pushed above its red 200-day moving average for the first time in a long time. Over the past couple of weeks, Alcoa then slipped into a consolidation phase around this moving average and above previous diagonal resistance.
With Wednesday’s post-FOMC rally, Alcoa shares looks ready to finally put more separation between themselves and that 200-day MA, if only temporarily so.
The $11 area — which is where the 200-week moving average and last October’s reaction high intersect — could be a possible upside target.
Any sharp bearish reversal, as always, should be a warning shot that upside momentum is waning.
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