Alcoa Inc (NYSE:AA) stopped its bigger-picture ascent last summer amid a rally in the U.S. dollar. However, with Wednesday’s FOMC meeting looming large, AA stock increasingly looks like an interesting candidate.
Specifically, Alcoa shares are nearing some notable technical support levels, making it an attractive long-side play on a bounce.
AA also looks good from a timing perspective, as Alcoa is due to report second-quarter earnings on July 8 — three weeks from now — which leaves just enough time for such a bounce to play out.
In yesterday’s column, I highlighted the fact that thanks to the aforementioned FOMC meeting, correlation among stocks — particularly on Wednesday and likely also on Thursday — is likely to track at high levels. In other words, market risk is high while the interest-rate decision is in focus, which should move stocks as a market (rather than as a market of stocks, where the focus would be on single-company issues).
To wit, this week is an important risk management exercise. Your job? Think more about making major mistakes, and less about trying to press bets.
One possibility on Wednesday is that Janet Yellen and the Fed remains dovish and data-dependent, which could rally bond prices (sending yields lower) and thus trigger selloff in the dollar. And considering that AA stock is exposed to commodity prices and thus is sensitive to movements in the U.S. dollar, a falling greenback could send Alcoa stock prices into the bounce house.
AA Stock Charts
Looking at the multiyear chart of Alcoa stock, we see that it stopped rising last summer as the dollar began to rally, and while AA shares rose to a marginal higher high in November, the U.S. dollar ultimately caught up with them. Now, Alcoa sits roughly 30% off those highs.
Note that the November highs also roughly coincided with the 2011 highs and thus the upper end of a multiyear trading channel. The 30% drop now has the stock retracing a little more than 50% of the entire 2013-14 rally. This is important in the Fibonacci retracement world, as AA now rests in a support zone between the 50% and 61.8% retracement levels.
Alcoa also is increasingly oversold from a momentum perspective.
Next, on the daily chart, we see that since early May, AA stock has dropped around 15% in a very persistent manner and in a narrow trading range that saw it (mostly) find resistance at the 8-day simple moving average (blue line).
This type of narrow-range selloff typically doesn’t last long.
Today’s trading idea: Look to buy AA stock on the next bullish reversal or daily close above the $12.10 area, which could result in an initial bounce back toward $12.70 as a first upside target.
Just keep an eye on the U.S. dollar around Wednesday’s FOMC meeting, as a decline would make Alcoa stock look a lot more bounce-worthy.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
