Alcoa Stock Flashes Technical Trouble Ahead of Earnings

One trader is seemingly opening a synthetic long position in the October series

by Lillian Currens

Published on Oct 16, 2019 at 11:20 AM
Updated on Jun 24, 2020 at 10:16 AM

Aluminum producer Alcoa Corp (NYSE:AA) has taken a beating on the charts recently. The stock hit an all-time low of $16.46 in late August, with a subsequent attempt at a breakout sharply blocked by the stock's 120-day moving average. Support at the $18 region caught the stock's most recent dip, with AA crawling higher today, just ahead of its third-quarter earnings report -- due out after the close this evening. This positive price action could be short lived, however, with even more pressure emerging on the charts in the form of the security's 70-day moving average. 

AA Oct 16

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, this historically bearish signal has flashed six other times, with Alcoa lower one month later every single time, and averaging a 7.2% drop. From its current perch at $19.61, a similar slide would put right back at the $18 region. 

Looking at the earnings history for AA, three of the last four quarterly reports have sparked positive reactions for the stock. This time around, the options pits are pricing in a 9.3% next-day move, double Alcoa's average 4.6% post-earnings move from the past two years. 

Speaking of the options pits, both puts and calls are running much hotter than usual today. So far, 2,252 calls and 3,293 puts have crossed the tape -- five times what's typically seen at this point. Trade-Alert is pointing to a potential synthetic long strategy, with one trader speculating with October 20 calls and 19 puts, suggesting this investor is expecting AA to rally north of the $20 region by the time the contracts expire on Oct. 18. 

While long calls have been more popular overall -- almost doubling their bearish counterparts during the past 10 days -- options traders have been warming up to puts, as evidenced by Alcoa's 10-day put/call volume of 0.59, which sits in the 85th percentile of its annual range on the the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This indicates a healthier-than-usual appetite for bearish bets of late. 

The brokerage bunch has been cautious on AA, with the majority of the eight in coverage calling it a "hold," On the other hand, the consensus 12-month price target of $25.17 represents a hefty 27.8% premium to current levels, which could result in some headwind-inducing price-target cuts, should Alcoa resume its journey south. 

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