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Alcoa Fails To Hold Breakout

10/20/04 12:18:02 PM
by Arthur Hill

Alcoa, which was profiled in late September with a triangle pattern, went on to break triangle resistance, but failed to hold this breakout. A reassessment is in order.

Security:   AA
Position:   N/A

Alcoa (AA) was profiled in late September with a triangle pattern. The stock went on to break triangle resistance, but failed to hold this breakout and a reassessment is in order.

First, let's recap the September situation. Alcoa (AA) broke key support at 32.60 with a sharp decline from 39.44 to 28.51. The support break turned the trend bearish and stock then consolidated. At the time, the Materials sector was quite strong and AA was a laggard. As such, it was thought that a triangle breakout at 33.40 would be bullish and open the door to the prior highs around 40.


Figure 1: Alcoa


The breakout did indeed occur, but the stock failed to hold and the materials sector has also fallen on hard times. The materials SPDR (XLB) broke neckline resistance of an inverse head-and-shoulders, but failed to hold the breakout and declined sharply over the last few weeks (red arrow). Further weakness below 26 would break the trendline extending up from May 2004 as well as the September low. This would bode ill for AA, especially since it has been underperforming the whole year.

Figure 2: XLB
Graphic provided by: MetaStock.
 
Turning back to Alcoa, the triangle has evolved into a rising wedge as the stock labors higher. These are typically corrective patterns and the advance to 34.60 retraced 50-62% of the prior decline, which is a typical retracement for a correction. As long as the wedge rises, the bulls get the benefit of the doubt. A move below the lower trendline and prior low (about 30) would signal a continuation lower and project further weakness to the mid-20s. This support area is confirmed by the measured move projections (11 points) and the prior support zone. Traders can also look for a bearish signal line cross in moving average convergence/divergence (MACD) to confirm any weakness.


Figure 3: Alcoa




Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Date: 10/23/04Rank: 3Comment: 
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