The earnings season will kick off tomorrow when Alcoa (NYSE: AA) reports earnings after the close. I thought it would be a good time to breakdown the charts for Alcoa ahead of their earnings report.
Looking at the daily chart first, Alcoa looks like a pretty good investment right now. The stock has been in an upward sloped trend channel for the last six months. The stock just hit the upper rail of the channel and it looks like it will pull back to the lower rail. It has just come out of overbought territory, so a slight selloff should release some of the pressure
The monthly chart is where I found concern. The rally over the last six months has put the stock in an overbought situation based on the monthly stochastic readings and the 10-month RSI.
For me, overbought and oversold situations need to be evaluated on an individual, stock-by-stock basis. I looked at a chart for Alcoa that spans the last 15 years and marked each situation where the stochastic readings were overbought and the RSI was either overbought or close to it. The blue circles in the top portion of the chart coincide with the overbought levels marked in the indicator portion of the chart. The blue lines show how the price declined sharply in each instance over the last 15 years.
In the case of Alcoa, each time the monthly oscillators reached overbought levels like they are now, the stock dropped 35% or more in the following months. I don’t know about you, but when something is as reliable as these situations, I tend to shy away from buying the stock.
Rather than just relying on the charts, I decided to look at the sentiment readings for AA as well. I ran my sentiment composite on the stock, combining the short interest ratio, put/call ratio and analyst ratings into one combined number. The overall reading came in at 11.42 which I would usually view as bullish, but given the monthly chart, I am hesitant in this instance. I believe that you have to combine the sentiment analysis with the technical and fundamental analysis, and in this case the technical picture is the problem. It is also worth pointing out that the short interest on AA has fallen sharply of late with the number of shares sold short falling from 130 million to 86.9 million since the beginning of February through March 15 (the most recent short interest report).
I would not recommend rushing out and shorting Alcoa ahead of earnings just based on the monthly chart, but I also wouldn’t recommend rushing out to buy the stock. Analysts have ratcheted up their estimates over the past 30 days with six of the 11 analysts revising their estimate upwards. I doubt the stock drops or jumps too much on the earnings release. I would look to short the stock later this week based on the monthly chart with a stop loss set 10% above the entry price.
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