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[AA] Analysis

Let's start today's analysis with a new concept of divergence, especially the RSI Divergence. Divergence is when the price movement is opposing the direction of the technical indicator, and it indicates a potential trend reversal. Bullish divergence is when the chart is making new lower lows yet the RSI is making higher highs, and vice versa. However, it is much safer to use this divergence along with other technical analyses rather than using it alone.

Today's ticker is AA.

Alcoa is an American industrial/materials company and is the sixth-largest producer of Aluminium.

Looking at the daily chart, you can first recognize the ascending wedge pattern. A rising wedge is generally considered as a bearish pattern as you can see from the figure below.

If you examine the RSI indicator carefully, then you can identify the bearish divergence. Furthermore, the RSI has gone above 70, indicating that the stock has been overbought, and is due for some relief.

In addition, by looking at the candlestick itself, you can see that it has been rejected at the upper trendline two days ago, and there is a possibility for AA to break down the rising wedge pattern today.

We can further verify that the bounce is likely to occur soon in a weekly chart. Alcoa has been in that channel since the start of 2021 and has been rejected hard at the upper trend line. Therefore, this justifies my bearish view of AA.

Game Plan

This time, I will not buy a put option, but rather sell a call option. Notice that purple box with E in the daily chart of AA? It means that there will be an earnings report for AA, and generally around the earnings report day, the implied volatility (IV) of the option skyrockets. However, unless the earnings report was exceptional, the IV crashes and your contract gets less valuable due to vega (I'll cover the option greeks more thoroughly later on).

Therefore, I will short the call today.

  • 1/21 57 naked call

Entry under Tuesday's low of $59.12

Stop-loss above Wednesday's low of $60.70s

Price target $57

Good luck!

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