Trade of the Day: Alcoa Corp Travels Too Far Too Fast

AA stock offers traders with a trade setup for income

Shares of Alcoa Corp (NYSE:AA) for the trading week ending Friday rallied for a third week in a row following the latest quarterly earnings report. While the company reported good news and respectable guidance, AA stock as a result of a steep multiweek rally have now in my eye reached near-term exhaustion levels. Active investors and traders could look to set up income trades or take at least partial positions on any long-side swing trades.

Before looking at today’s trade of the day, allow me to reiterate that in my experience, the best trade setups during earnings season present themselves once any given company has reported earnings. In other words, holding trades through earnings reports in hopes of an immediate gratification payoff in my eyes is a low-probability strategy. Today’s trade idea focuses on what I consider to be a good-quality trade setup in a stock that has already reported numbers.

Alcoa Stock Charts

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

On the multiyear weekly chart we see that AA stock enjoyed the broader rally in commodities thus far in the month of April and as a result quickly reached the upper end of its up-trending channel that it has clawed higher within since early 2016.

Also last week, the stock finally reached its 50% retracement line of the entire sell-off since highs back in 2007 down to the 2009 lows.

Lastly, from a momentum perspective note that the weekly MACD oscillator at the bottom of the chart so far since November 2017 has been printing lower highs, thus not confirming the higher highs in price. This momentum measurement does not mean that AA stock is a “short” but rather shows that upside momentum through a multiweek/month lens is waning.

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

On the daily chart, we see the sharp month-to-date rally in AA stock better. The near vertical ascent of this recent rally how has it well extended above its near/medium-term moving averages. This is also reflected by the daily MACD oscillator, which is in notable overbought conditions.

While the stock could see a further bid even in the near term, particularly if commodities continue to hold up, in my eye the upside momentum is not sustainable at this recent rate. Thus, an income trade for options traders is looking to set up.

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Specifically I am looking to make the bet that AA stock does not sustainably push above the $65 mark in the coming couple of weeks. To make this bet, I would look to sell the June $65-$70  bear call spread. Any further strong one-day rally would be a stop loss signal while a retracement back to the $55 area would be a first profit taking level.

Check out Serge’s Daily Market Outlook for April 23.

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