Time To Buy Alcoa

Jun. 3.12 | About: Alcoa, Inc. (AA)

Alcoa (NYSE:AA) is primed for a nice short term move to the upside. I have included the block activity matrix below for your review. Although the provided data in the block matrix is substantial, I have filtered out any blocks below 1,000,000 shares. There were numerous blocks in the 500,000 share range. Nevertheless, the more significant blocks for ALCOA are typically in excess of 1,500,000 shares.

I suspect that Alcoa was extensively distributed from mid-March until May 1stת where the block trade of 1,158,357 shares traded. In my opinion the trade on May 1st was a short and the block on May 18th of 1,051,903 shares was a short covering. This leads me to believe that Alcoa will be advancing albeit in a measured response. These are simply control blocks and not yet indicative of a major reversal of the downward trend.

This analysis is independent of Fundamentals. I am intentionally leaving them out of the equation because the emphasis is on the short term goals of a trade, instead of long term thinking. Fundamentals although important, are not the drivers (at least in this instance) for this trade. Therefore, this recommendation does not take into consideration what the dollar or euro will do for the short term, China's hard or soft landing, developments in Greece, or any other fundamental hackneyed Kentucky windage being bloviated by the media.

This trade is market specific and issue specific. Short term trades by their very nature should focus on the structure and function of the market and study its potential consequences. These are tactics, and tactics are the deductive counterpart to strategy. Superior tactics come from assessing specific observations and developing measures and countermeasures which are immediately deployed. The more specific the tactical declaration: the greater its profitable use.

There are many tactical alternatives for every strategic choice. This is why tactical considerations rapidly overwhelm human reasoning and why the ability to effectively trade in highly volatile markets is so rare. It is also why I have attributed the Designated Market Makers inventory objectives as the supreme driver for the short term price advance in Alcoa and have forgone the other less relevant fundamental data.

(click to enlarge)Click to enlarge

On the Basis of the foregoing these are my views and observations:

The Trade:

I recommend establishing a long position in Alcoa. Open your position with only 1/4 of whatever capital you intend to commit to Alcoa at $8.35. Purchase the remaining 3/4 of the position at $7.68 and stop out at $7.37. Do not post your stop out. I have said it before, but it is so important that at the risk of being redundant I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at an upside price target of $9.37. Do not allow this position to exceed 5% of your overall portfolio. Alcoa could advance to $12.00, so it may be prudent to liquidate ½ of the position at $9.37 and exit the remainder at $11.50.

This is a trade, not an investment.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AA over the next 72 hours.