China is feeling the pinch of the European debt crisis now because it is a key trading partner for the Asian nation. Because of this, Alcoa continues to struggle as it scales back its 2012 predictions for aluminum consumption around the world. Even though the third quarter profit beat analyst expectations, there is little to celebrate. The huge drop today offers an income play, though, for the savvy investor.
Global companies like Alcoa (AA) will continue to struggle this quarter and into 2013. Growth in China is lackluster; even the World Bank cut its growth forecast for East Asia on concerns China's slowdown could last longer than expected.
We are at a turning point in the markets I believe. It has not been a surprise that the global economy continues to contract. The markets have been affected by this for some time now. At the same time, banks are flooding the markets with cash and artificially supporting certain asset pricing. What is going to happen to global companies like Alcoa with global growth? How will it impact these companies over the next few quarters? Wall Street is expecting earnings to fall by 2.3% this quarter which is the first time it has happened in three years!
I do not believe this will have a positive affect upon the markets and I believe a correction is still coming. I do not believe Alcoa will move past 9.7 this time before it contracts again.
(click to enlarge)
Technically Speaking
Alcoa has been on a steady bullish peak and valley formation since early August. The move in September was a bit extreme because it was reactionary to QE3 anticipations. But as the stock came down, it settled on the support line and has continued up. The RSI indicator is supporting this move up. The recent over bought conditions took place because of the extreme move, but the trend appears to be getting stronger. The MACD is not signaling anything out of the ordinary either, but supporting the trend. I think we may see the 50 day MA become support soon if the stock continues to move like it is.
The Options Play
The stock is presently trading at 8.71. I would look at a straight bearish options play on this stock as one who is looking to attempt a short term income play. While it is true that the aerospace industry has helped Alcoa's bottom line, I am not yet convinced that a bullish position is a good play for the stock. But at this point I do see it moving back up to '9' before year's end.
- Buy the January 2013 call with a strike of '9' (priced at $0.44)
- Risk: price of the stock
- Profit potential: unlimited
- Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Global economy is still contracting
- Lower earnings in the third quarter may move markets down along with Alcoa
- Its present pattern calls for a move down close to 8.0 which is support.
Even though Alcoa is being pushed way down, I believe this present move is reactionary and we will see the stock spike to 9 before January options expiration. This is what we are going to capitalize upon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
