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BREAKOUTS


Alcoa Turns Weaker

04/23/10 12:35:11 PM
by Chaitali Mohile

The breakouts of Alcoa have failed to take off.

Security:   AA
Position:   N/A

Alcoa (AA), the third-largest producer of aluminum in the world, has formed an ascending triangle on its daily chart. The pattern is a short-term bullish reversal formation as it is formed at the bottom of a bearish move. During the formation, the average directional movement index (ADX) (14) indicated a downtrend for AA. In Figure 1, the ADX (14) descended from the 30 levels along with the selling pressure indicated by the negative directional index (-DI), suggesting a trend reversal. The higher lows formed an ascending buying line, and a flat selling line was developed due to stable highs. Later, the trading range narrowed and prices broke out of this pattern. Volume was discouraging and the bullish breakout failed as price moved sideways. AA was nailed with the newly formed selling line support in Figure 1.

FIGURE 1: AA, DAILY. The ascending triangle formed at the bottom was broken in the bullish direction but turned sideways.
Graphic provided by: StockCharts.com.
 
Although the downtrend reversed, the pattern breakout failed to develop a fresh bullish trend. The ADX (14) plunged below the 20 levels. The -DI and the positive directional index (+DI) that reflected the buying pressure struggled to establish themselves. However, they continued to move with equal pace, resulting in consolidation. Thus, the ascending triangle breakout failed. The full stochastic (14,3,3) in Figure 1 also formed an ascending triangle, which later witnessed a bearish breakout. This suggested major failure for the stock.

Currently, AA has rallied below the support line, indicating the bearish hold. The trend indicator is indicating weakness in the trend, and the momentum oscillator has reached its oversold area. We cannot anticipate a new bullish rally unless the stochastic surges from 20 levels. Traders can open new long positions only above the seller's line at 14 and confirmed upward action indicated by the stochastic. Currently, the -DI has conquered the +DI. Therefore, for the robust bullish price rally, the DI's position should be opposite of what it is now.

FIGURE 2: AA, WEEKLY. The breakout of the inverted head & shoulders failed to move higher.
Graphic provided by: StockCharts.com.
 
Similarly, on the weekly time frame in Figure 2, the bullish breakout failed, forming a major bullish trend reversal pattern -- the inverted head & shoulders. The neckline resistance at 12.5 levels was converted to support in mid-2009 with a healthy rise in volume. The volume began to surge immediately after the head was formed and AA rallied towards the neckline, forming the right shoulder. However, the increased volume remained stable as the breakout turned sideways. Initially, the overheated downtrend was changed to the developing uptrend; the ADX (14) drifted from the 40 levels to 20 levels. However, the new uptrend failed to surge above 20 levels and turned weaker by moving deep below the 15 levels. Thus, the bullish breakout failed to move towards the target. The rally moved parallel to the neckline support at 12.5. The moving average convergence/divergence (MACD) (12,26,9) shows high volatility.

In such a scenario, AA is likely to remain weak for the next few weeks.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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