Sunday, July 11, 2010

Mixed Picture For Alcoa

The impulsive pattern continued its development in the stock markets this week as they finished the week on a positive note with 4 up days in a row. Friday's action likely completed a small degree 3rd wave in the still incomplete impulse. Waves 4 and 5 should complete by Tuesday or Wednesday this week. Afterwards a small pullback would be expected before the advance continues, unless we see the impulse subdivide into a (i), (ii), i, ii. Though this would be a lower probability outcome, it would be confirmed by a single day advance on higher volume than occured on Wednesday, July 7, before a pullback begins.

Alcoa reports after the close tomorrow. The technicals for AA are bullish overall. However, the short term picture is mixed. The most common targets for a head and shoulder pattern are 50% and 61.8% of the height of the pattern. Many traders use the full height of the target, but I have rarely seen that outcome. From an elliottwave perspective, we either have a completed pattern as the January low completed a flat correction, which is followed by 7 waves down from the April high, or the pattern is incomplete as the January low was the end of the initial impulse, wave A, and the current impulse wave, wave C, requires one more move down to finish.

If the former is the case, then AA should move up strongly this week. The positive divergences in the MACD and RSI support this view. If the latter is the case, then look for another low for AA down to the 9.32 level before it takes off. A solid move above the January low of 12.26 should mean AA is on its way to new highs, even if it takes awhile for it to get there.

The take-away from Alcoa's chart, as I see it, is that even a disappointing earnings announcement should not derail the current rally as any selloff should complete the current pattern and AA should begin to rally by the end of the week.

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