Has the metals sector regained its luster? The group was largely left out of the first half of the 2013 bull market, but certain issues have shown recent gains.
Alcoa (AA), the aluminum producer and former Dow component, has yet to bounce, but the stock has a potential shiny upside from a technical perspective. A $40 stock in 2008, AA has spent most of the past year under $10. An $8 support base formed during the past two years. Plus, a bullish wedge pattern targets a move to $10.50.
An upside breakout to new 52-week highs is the first step in the march north to $13, the objective from the five-year chart. AA has tracked sideways between $18 and $8 since 2009, which means midpoint resistance of that range sits at $13.
The $13 target is about 39% higher than recent prices, but traders who use a capital-preserving, stock substitution strategy could see a 100% return on a move to that level.
Recommended Trade Setup
Buy AA Jan 2015 7 Calls at $3 or less
Set stop-loss at $1.50
Set initial price target at $6 for a potential 100% gain in 13 months
A close below $8 in AA on a weekly basis or the loss of half of the option’s premium would trigger an exit. If you do not use a stop, the maximum loss is still limited to the $300 or less paid per option contract. The upside, on the other hand, is unlimited. And the January 2015 options give the bull trend more than a year to develop.
This trade breaks even at $10 ($7 strike plus $3 options premium). That is less than $1 away from AA’s recent price. If shares hit the $13 target, then the call option would have $6 of intrinsic value and deliver a gain of 100%.
