Alcoa Inc. (AA) illustrates the importance of looking at weekly as well as daily charts. On a daily chart, it was in a reasonably strong uptrend through early April, when it quit making higher highs and lows and appears to have gone into a range. AA is pulling back to the 50-MA, which tends to act as support at the trendline, suggesting a possible resumption of the earlier move up if it bounces off that support level.

Now let’s look at a weekly chart for AA, and we see in a very different light the uptrend that began in October:

(click on charts to enlarge image)

Note that what looks like an uptrend on the daily chart appears on a weekly chart to be merely an up-leg in a long-term trading range, with the stock now pulling back from resistance at the $36 range top. We would normally expect Alcoa to continue downward to the main or even extended range bottom. But - stocks don’t range forever; every range ends sooner or later. Note that the 50-MA is not very useful on the weekly chart, though it rules on the daily.

The careful observer will note that AA might be forming an ascending triangle, often a bullish sign, since conventional wisdom suggests any trend in place will continue as the triangle resolves at the tip. Yet triangle is as triangle does. If Alcoa finds support again at the 50-MA/trendline and makes another run at resistance, the case for an ascending triangle will be strengthened, and a couple more runs at the range top would forecast even more strength, but it is too early to tell. A bounce off support would be somewhat bullish but far from conclusive, given the strength and depth of the long-term range.

This is not an in-depth article about how to trade or time Alcoa, of course. I’m just making the point that it’s very common for daily and weekly charts to show different things; sometimes radically different things. The point is to check both charts and make sure of what you’re dealing with.

The metals industry is strong, and an announcement confirming takeover rumors about Alcoa would move the stock up, thus bears should proceed with caution.

It is too early to buy puts or take other bearish action (bear call spread, naked call, etc.); we need to see a convincing breakdown below the 50-MA and trendline on the daily chart. If it convincingly breaks that support level, though, it is bear food.

Covered Calls:
Covered call returns on AA are poor at this time, so it is not a good buy-write candidate. If you already own it, consider waiting to see if it holds support before writing it again. If it bounces off the 50-MA, write it higher and perhaps further out for larger premium. But if it breaks support as discussed above, writing deeply ITM calls on portfolio shares might be in order to pocket as much as possible of the pullback. Or in the event of a breakdown below support, consider buying a long-term put, which would free you to write calls and pull in premium income, leaving you eventually with the choice of exercising the long put or flipping it and keeping the stock.

This entry was posted on Monday, April 23rd, 2007 at 3:10 pm and is filed under Covered Calls, Technical Analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.