Tracking the Relevant Commodity – Aluminum for Alcoa (AA)

Alcoa (AA) is an interesting case study. I’ve spent probably several months worth of analysis on this particular stock. But recently, I began to trade based purely on price analysis and I wanted to apply some of those principles to trading Alcoa. I would also like to figure out if my methodology is sound. In addition, I have short positions in the stock and I wanted to know if the stock is about to continue its downtrend or if it will change direction and move upwards. Due to specific conditions, AA provides a perfect opportunity to explore all these questions.

Below is the most recent chart of AA (December 15, 2017) on the 6-month daily view at around 12:11pm.

Notice the consolidation period beginning November 13. This is the area of interest. At present, it is at a golden zone and at a major support line. In addition, it had just experienced a sharp drop from a high of $50.31. What is actually trending inside these candlestick bars? Where will price go? What do the institutional traders want to do to the price?

Update – December 19, 2017:

Since posing my questions above, my analysis has changed. Unfortunately, my discovery of a key factor came too late. As I did not finish writing my original analysis and conclusions, I will continue forward with the modified conclusion.

As of December 19, 2017, AA’s chart appears as below. Notice that there has been a rally in AA’s price.

One of my original questions was to figure out where the stock will move after consolidation. It had respected the golden zone but it was unclear as to whether it would reverse and move upwards or continue its downward trend. I had originally concluded that it was more likely to continue downward. My conclusion remains the same though modified.

During my initial investigation, I had discovered that ThinkorSwim’s chart of Alcoa is different from the charts of other free, online charts. Below is ThinkorSwim’s 10-year weekly view of AA and next to it, the same chart but pulled from Trading View. I drew a resistance/support line in both charts and circled key points. Notice that on ThinkorSwim’s chart, it appears that Alcoa’s price touched resistance then bounced right off of it while on Trading View, the price broke through resistance and was testing support. Depending on the chart you were using, you would have possibly come to two very different conclusions: with ThinkorSwim, a further downtrend and with Trading View, a rally to new highs.

This is no small difference between the charts. For the next few weeks, I set out to figure out why there was a difference. I eventually figured it out. It turns out that Alcoa had a 3-1 reverse stock split on November 1, 2016. Referring back to my old research, I remembered that Alcoa split its downstream operations and moved it to a new company, Arconic (ARNC). They did this so that Alcoa’s price would closely follow aluminum prices (the stock was having trouble following aluminum pricing consistently because investors were evaluating its pricing based on downstream revenue). The difference in the charts is due to the price adjustment during the split. On October 31, 2016, Alcoa’s price closed at $28.72. On November 1, 2016, the stock price was adjusted for the split and opened at $22.10. This is what ThinkorSwim recorded. The adjustment for the split was applied correctly. However, Trading View did not apply the adjustment in this manner. Rather, they applied the adjustment to the new price and all the old prices. In other words, it was as if no adjustment had been made. As a result, you get the chart indicating a breakout when in fact, no breakout had occurred. This was the first key factor.

The second factor builds on the first. If Alcoa split out its downstream operations for the purpose of getting its stock price to move in-step with aluminum prices, then did it work? To find out, I overlaid $DJUSAL (Dow Jones U.S. Aluminum Index) on Alcoa’s 6-month and 1 year daily charts. $DJUSAL is the red line and the candles represent AA’s price.

From the charts, it is clear that Alcoa’s stock price moves in lock-step with $DJUSAL’s price. In other words, if you trade AA, you are not actually trading based on the company’s fundamentals or price action; you are effectively trading aluminum futures. This changes everything. I had based my original conclusions on Alcoa’s fundamentals and price action when I should have based it on $DJUSAL’s price action and world-wide aluminum pricing fundamentals. That would also include the effects of China’s aluminum production and curtailment, U.S. tariffs, the futures-purchases of aerospace, marine, and heavy equipment manufacturers, and the performance of major airlines, trucking companies, and marine shippers. But as it stands, it is too late for me for I already have a position. All I can do is work off of technical analysis using support & resistance lines.

I pulled $DJUSAL’s pricing for the last 10 years and drew an appropriate resistance line. Notice how price had broken through the zone and failed to stay above the zone. During the consolidation phase first noticed in AA (which is really a duplicate of $DJUSAL’s consolidation period), price respected a golden zone. That same golden zone can be applied to the aluminum index. If I had seen this chart earlier, I would’ve taken profit near the bottom of the consolidation zone. I would then wait for price to re-test the resistance zone/line and potentially (depending on what price indicates) look to short AA slightly above the resistance zone. But as the saying goes, hindsight is 20/20.

As of now, I am rather stuck. I cannot average my loss and I cannot take the loss at an unconfirmed high. All I can do is wait for price to indicate whether it is going to trend lower or breakout through the resistance zone.

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