ATI: Bullish Continuation Move

07/07/14 03:32:37 PM

by Donald W. Pendergast, Jr.

After a large run up and subsequent consolidation pattern, shares of Allegheny Technologies are surging higher once again.

Security: ATI
Position: N/A

Up by more than 50% since making a significant cycle low in early February 2014, shares of Allegheny Technologies Inc. (ATI) show no sign at all of an impending trend reversal — at least not on its daily time frame. Here's a closer look now at the bullish continuation move that recently launched in ATI, along with a low-risk, high-probability way to play further upside in this stock.

Figure 1.: Allegheny Technologies Inc. (ATI). ATI frequently surges after it emerges from a narrow-range consolidation pattern; the current rally appears to be a continuation move of the prior February-April '14 run and may have plenty of upside remaining.

Graphic provided by: TradeStation.

For a large cap S&P 500 (.SPX, SPY) component stock, ATI offers a nice mix of tradable swing and/or trending moves to capitalize on, without having a lot of news-driven hype to cause undesirable volatility. One glance at a daily or weekly chart of the stock is enough to confirm this, so be sure to put this stock on your watch list on potential swing/trend trading candidates. Currently, here are the main dynamics driving ATI on its daily chart (Figure 1):

1. Long-term Chaikin Money Flow (CMF)(89)is mega-bullish; the stock is at a new high and so is the CMF histogram.

2. Short-term Chaikin Money Flow (CMF)(21) is also supportive of more gains; neither of the money flow histograms reveals any hint of distribution by the "smart money" institutional traders in the market.

3. Two weeks ago, ATI broke higher from a month long, narrow-range consolidation and has never looked back; given the size of the prior rally (early February to late April 2014) this looks to be a near textbook example of a bullish continuation pattern.

4. ATI is easily outperforming the .SPX over the past 13 weeks.

All in all, this appears to be a large cap issue that the major institutions (who account for 80% of all US stock market volume) really like right now, and with the "line of least resistance" being toward higher prices, one of the simplest, lowest risk, and safest ways to play this move is to put on a near-term covered call trade.

Figure 2. ATI call options have a fairly wide bid/ask spread so be prepared to work a bid to get a better price if possible.

Graphic provided by: TradeStation.

Graphic provided by: TradeStation RadarScreen.

The August 2014 $42.50 ATI calls have a slightly wide bid/ask spread; you may need to do a bit of "market timing" to get this to work in your favor. These calls are in-the-money and will give you more staying power than the 45.00 calls will, especially since the rally is already underway and you need a bit of pullback protection. Using a 21-day exponential moving average (EMA) will provide a basic, logical trailing stop for the position, one that will give the stock some freedom to back and fill as it hopefully moves toward the upper Keltner band and continues to trend. A daily close below the EMA means you close out the position and move back to cash, but as long as the stock stays above the EMA, simply hold on until option expiration on the third Friday of August 2014. Keep your account risk for the trade at 2% or less and remember to trade wisely until we meet here again.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the Trendzetterz.com S&P 500 Weekly Forecast service.

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ATI: Bullish Continuation Move

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