A Pennant For Alcoa

06/20/06 08:38:25 AM

by Arthur Hill

Alcoa formed a pennant at support, and the subsequent break holds the key to the next directional move.

Security: AA
Position: Hold

Alcoa (AA) declined sharply in May and June as the materials sector led the market lower. The stock gapped down in mid-May, broke wedge support in early June, and consolidated over the last two weeks. The stock also consolidated between 28 and 31 in March, and this support zone now extends into June.

Pennants are neutral patterns that depend on a break to trigger a signal. As their shape shows, they represent a small and tightening consolidation as the battle between bulls and bears narrows. A bias is usually given to the prior move, which was down in early June. A break below the lower pennant trendline and pennant low (28.55) would signal a continuation lower and target further weakness to the mid-20s. Should the stock hold support here, look for a break above the upper pennant trendline and pennant high (31) to trigger a bull signal. This would be a reversal of the early June decline and the first target would be 33–33.5.

FIGURE 1: ALCOA. A move above the early June high could act as a bullish trigger.

Graphic provided by: MetaStock.

Graphic provided by: MS Quotecenter.

In Figure 1, I am also watching the stochastic oscillator for a potential upside breakout. The oscillator moved to oversold levels in May and formed a higher low in June. This amounts to a positive divergence and shows less downside momentum. A move above the early June high (30) could also act as a bullish trigger.

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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