Trade of the Day: After Correcting, Alcoa Corp Offers Better Reward to Risk

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Editor’s Note: The Daily Traders Alert and Beat the Bell will not be publishing on Nov. 24 and Nov. 25 due to the Thanksgiving holiday. They will resume their regular schedule on Nov. 27.

Shares of Alcoa Corp (NYSE:AA), after a recent corrective move last week, looked to have found better footing again. Both from a structural and technical perspective, this stock now looks to offer better reward to risk again on the long side.

The materials sector of stocks of the S&P 500 as represented by the Materials Select Sector SPDR (NYSEARCA:XLB) exchange-traded fund for 2017 remains in a firm bull trend, which in recent  months has been aided by a bid in the energy commodities.

In relative terms, AA stock has been a strong outperformer year-to-date versus the broader basic materials stock sector, and in fact, the recent pullback looks to have been constructive  both in relative and absolute terms.

AA Stock Charts


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Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

To gain some perspective on AA stock, let’s take a look at its multiyear weekly chart. Here we see that following the sharp decline during the 2008 financial crisis, the stock bounced like most other assets and stocks, but this bounce was relatively short lived.

By late 2009/early 2010 AA had reached a level around the $40 mark that would eventually take it another seven and three quarters years almost to overcome.

In other words, AA stock spent the better part of the last 10 years consolidating in a well-defined sideways range — that is until a breakout occurred this past August.

In August AA stock  managed to hurdle itself above this area of resistance around the $40 mark (blue line). Like many technically sound breakouts, this one ultimately had to be retested, which is exactly what it looks like from here that the pullback of recent weeks accomplished. The 20% corrective move of the past few weeks has now pulled the stock back to an area of former resistance, which may now act as technical support.


Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the daily chart, we see this recent pullback a little more close up and note that it has come to a halt last week at what I define as a so-called “technical confluence support area.” This confluence area is made up of horizontal support (prior resistance) as well as the blue 100 day simple moving average, on a daily closing basis.

From a momentum perspective, AA stock last week reached a deep oversold readings as per the MACD momentum oscillator at the bottom of the chart.

From here, active investors and traders could try the stock from the long side with a net upside target back up in the high $40s. Any bearish reversal that would result in AA stock closing back below the $40 mark on a daily closing basis could be used as a stop loss signal. Remember, one can always get back into a position for opportunities are easier made up than losses.

Check out Serge’s Daily Market Outlook for Nov. 20.

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