2 Metals Stocks Trading Near Historically Bullish Trendlines

Low volatility expectations are currently priced into near-term options on Allegheny Technologies Incorporated (NYSE:ATI) and Vale SA (ADR) (NYSE:VALE) -- a potential boon to premium buyers

Mar 9, 2017 at 3:09 PM
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Technical analysis is one cornerstone of our three-tiered methodology to trading options here at Schaeffer's Investment Research, an approach commonly referred to as Expectational Analysis®. Each week, Schaeffer's Senior Quantitative Analyst Rocky White highlights stocks that have pulled back to historically significant trendlines. This week, metal stocks are in focus, with mining names Allegheny Technologies Incorporated (NYSE:ATI) and Vale SA (ADR) (NYSE:VALE) making the list. Plus, with low volatility expectations surrounding shares of ATI and VALE, it may be a prime time to use options to bet on the stocks' near-term trajectory.

An Allegheny Technologies Bounce Could Shake Short Sellers Loose

ATI has added 25% in the last nine months, though the stock has been struggling since topping out at an annual high of $23.69 in late January. While the shares are off 4.3% today to trade at $16.99, they have pulled back to their 160-day moving average -- which has served as a springboard in the past. Specifically, in the five other times ATI has retreated to this trendline in the last three years, the stock has averaged a one-week gain of 3.1%, and has been positive each time. Additionally, the shares appear to have found another layer of support near $17, which is home to ATI's late-January pre-bull gap close.

ati stock daily price chart

A bounce from here could certainly shake some of the weaker bearish hands loose, too, which could create tailwinds for ATI. Short interest jumped 12.5% in the two most recent reporting periods, and now accounts for nearly 27% of the stock's available float. It would take more than two weeks to cover these bearish bets, at ATI's average pace of trading, meaning there's ample sideline cash available to help fuel any future rallies. Short-term options on Allegheny Technologies Incorporated are pricing in historically low volatility expectations at the moment -- a potential boon to premium buyers -- per the stock's Schaeffer's Volatility Index (SVI) of 50%, which ranks below 94% of all comparable readings taken in the past year.

 

Vale Shares Could Find a Level of Options-Related Support

VALE has surged 138% year-over-year, and topped out at a two-year high of $11.70 on Feb. 21. Since then, the stock has pulled back to its 80-day moving average to trade at $9.38. However, in the four other times VALE has consolidated near this trendline over the last three years, the stock has gone on to average a 21-day gain of 5.6%, and has been positive three-quarters of the time.

On the sentiment front, hefty put open interest is found at the underfoot March 9 put, where 20,310 contracts currently reside. This could translate into a layer of options-related support for VALE, as the hedges related to these bets unwind ahead of expiration at next Friday's close. Meanwhile, the outperforming stock seems due for a round of bullish brokerage notes, considering more than half of covering analysts maintain a tepid "hold" recommendation. Premium buyers could find a good deal on Vale SA's near-term options, as well. Not only does the stock's SVI of 55% rank in the 13th annual percentile, its Schaeffer's Volatility Scorecard (SVS) is perched at a lofty 94. Simply stated, the security has tended to make outsized moves over the past year, relative to what the options market has priced in.

vale stock daily price chart

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