Alcoa (NYSE:AA) is not the same company it used to be. But it continues to forge ahead with its alumina and aluminium business, as they make up the bulk of its business. And as with most industrial stocks, AA has had its challenges last year — partly due to the global tariff wars and also due to the sentiment that growth is slowing down.
This year, the stock is doing much better than it finished 2018. It is now up 9.6% year to date. But this is still lagging the S&P 500 and the Dow Jones, which are both up over 11% for the same period.
Investor sentiment is now much better, even though we still have the tariff war deadlines looming. The only difference this year from last is that the central banks are now back in stimulus mode. This started with U.S. Federal Reserve Chair Jerome Powell clearly stating that they are almost done raising rates. Also, China now is completely and publicly committed to stepping on the growth pedal, perhaps in an effort to offset the losses they are suffering from the tariff war. The ECB is back into keeping the easy money situation for long.
So all this is to say that the whole world is still highly committed to growth, and that is good for companies like Alcoa. So unless management commits major mistakes in execution, its stock has support.
The AA Stock Opportunity
Today’s opportunity is of the technical nature. AA stock has been in a descending wedge for months. It has set a lower-high trend since its earnings report almost one year ago. This stock slide created a descending wedge that is now very tight. So there should soon be a breakout from it.
Alcoa stock is showing the first signs of stabilization. Since the Christmas lows, it has set higher lows, forming what looks like a trough. This is how bottoms form to establish a base from which the bulls can put forth an effort to rebound. Those bulls need a solid floor against which they can push upwards.
Meanwhile, it is still making lower highs, so the tightening range is creating tension in the stock and building energy. This has to release itself soon as the battle comes to a pint point on the charts. Just above current levels there are trigger lines. If the bulls can push through resistance around $29.40 per share, they would invite momentum buyers.
Click to Enlarge Conversely, if the bears break through this base then this would bring back momentum sellers and the selling could intensify.
Earnings are drawing near, and they could be the catalyst that decides the outcome of this battle between bulls and bears over the next move in AA stock. The best way to trade the upside potential is to go long the stock ahead of its earnings and profit from the potential rally going into the event.
But I would lock in the profits before the actual headline. The short-term reactions to earnings are binary. We don’t know what the company will report — and more importantly, we don’t know how Wall Street will react to it. AA has not had a history of good reactions to their earnings reports. They’ve had three of the last four reactions be negative.
Those looking to invest in AA stock for the long term need not worry about the short-term gyrations in the stock. But I’d definitely set a stop loss level, and $26.40 and $25.10 are important lines to hold even for the long-term investors. AA stock is not cheap at a 24x trailing price to earnings ratio, though, so the downside risk if management disappoints is real.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.