Chart of the week: History says these shares have bottomed
After a string of successful trades, this could be another genuine opportunity at just the right time.
28th October 2019 11:29
by John Burford from interactive investor
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After a string of successful trades, this could be another genuine opportunity at just the right time.
Can Alcoa recover?
I have found quite a few bombed-out shares for COTW recently - five of my last seven are Barclays (LSE:BARC), BT (LSE:BT.A), British American Tobacco (LSE:BATS), Metro Bank (LSE:MTRO) and General Electric (NYSE:GE). They are all on my Buy Low/Sell High list and all are in profit. I believe I can now add Alcoa (NYSE:AA) to it.
Incidentally, the sixth of my last seven COTWs covered McDonald's (NYSE:MCD), which is on my Sell High/Buy Low list – and it too is in profit on short sales.
It is one thing to find a severe under-performer - that involves little skill. But it is another to identify a genuine opportunity at the right time. It is no good getting in too early (or too late!). And gut feel is not a good reliable timing method.
Alcoa is a major producer of aluminium. Its fortunes are tied hand-in-hand to the market price of the metal which has been in a severe decline in recent months.
Here it is on the daily chart:
Source: interactive investor Past performance is not a guide to future performance
But is this picture showing a reversal is at hand? I have a classic Wedge/Ending Diagonal with the 3 October low making a small 'overshoot' that can often indicate buying exhaustion after a lengthy decline. If so, then Alcoa should follow suit. Here is the long-term monthly chart:
Source: interactive investor Past performance is not a guide to future performance
In fact, the shares have been caught in a well-defined 10-year range between the $20 and $50 areas, and the recent low has dipped to the lower zone which is a 10-year support area. If history is to repeat, the shares should now stage a recovery of some sort.
Source: interactive investor Past performance is not a guide to future performance
Another clue is that this is the decline off the April 2018 high at $63 which I can label as five waves. But note the form of the latest action at the end of the fifth wave. It closely resembles a Head and Shoulders reversal pattern. I have drawn in the 'neckline' in blue which a push above it at the $22.50 region would confirm.
It is possible that wave 5 has not completed, but already it does possess its own five sub-waves making it very likely the low is in or very close. And I have a momentum divergence working in our favour, so my best guess is that the low is in and odds favour a bull run with my first target around the $31 zone. Higher potential exists to the $40 mark.
For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com.
John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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