Don't jump the gun on metal stocks

Double-bottom patterns on the charts for key metal producers could bring about good entry points for patient investors in 2012.

By MoneyShow.com Dec 5, 2011 12:14PM

By Tom Aspray, MoneyShow.com


China's decision last week to lower bank reserve requirements suggests the emerging giant could cut rates in 2012. It is thought that such a rate cut would stop the slowdown in the Chinese economy and be positive for other emerging market economies as well.


The aluminum market has been hit hard by the weakness in the global economy, and prices have declined while supply seems to be increasing. As a result, the decision by Rio Tinto (RIO) to invest $2.7 billion in order to complete an aluminum mine in British Columbia suggests the company expects aluminum prices to be firmer when the plant is completed in 2014.


If that outlook is correct, should we be looking to buy the stocks of the key aluminum companies now?

Click here to enlarge


Chart Analysis: The weekly chart of the S&P 500 Aluminum group shows that it formed higher lows, line b, two weeks ago. This could be a double-bottom formation with key resistance now at 76 (line a).

  • The weekly relative performance, or RS analysis, broke its uptrend in April 2011 and has since been in a well-defined downtrend, line c
  • As discussed last month, double-bottom formations have a typical volume pattern where volume is highest on the initial low and then declines as the second low is being formed
  • Volume at the October lows was clearly much higher than it was in November
  • Weekly on-balance volume (OBV) has formed lower lows, line e. The OBV is well below its declining weighted moving average (WMA) and the longer-term downtrend, line d
  • On a close above 76, the double bottom would be confirmed with upside targets in the 96-100 area

Rio Tinto (RIO) peaked in early 2011 at $76.67 and formed lower highs. RIO cracked support in early August, dropping from $72 to just above $57

  • The longer-term uptrend, line g, was broken in late September when RIO declined to a low of $40.50. This was a drop of 47% from the highs
  • The RS line also broke its long-term uptrend (line i) and just rebounded to retest this resistance at the end of October
  • Weekly OBV shows a similar formation, as it also broke its long-term uptrend, line j, in November. It is below its declining weighted moving average
  • Last week’s close was encouraging, but there is resistance at $55.50 and much stronger resistance in the $59-$60 area

Alcoa (AA) has had a rough year, as the stock is currently down over 30% even though it did not make new lows at the end of November, line b. There is next resistance at $10.60-$11.

  • A strong close above resistance at $12, line a, would suggest that a double-bottom formation had been completed
  • Daily RS analysis has formed lower lows (line d) and shows a well-defined downtrend, line c
  • Daily OBV looks a bit better, as it has formed higher lows, line f, but is still below its weighted moving average. A move above the downtrend, line e, is needed to suggest that a low has been formed
  • Weekly RS and OBV analysis (not shown) are both negative
  • Near-term support stands at $9.58 and then $8.45

The Aluminum Corporation of China (ACH) is a $6.24 billion company whose stock peaked in November 2010 at $26.80 and has since had a rough 2011, having declined by over 48%.

  • The daily chart shows that support, line h, was broken on November 21, which was negative
  • The completion of the trading range (lines g and h) has downside targets in the $7.80-$8.20 area
  • Daily RS is still holding its trading range (lines i and j), but a strong move above the recent highs at line i would be needed to suggest a bottom has formed
  • Daily OBV violated its uptrend, line l, in early November, which preceded the recent decline. The daily OBV did form a negative divergence at the recent highs, line k
  • There is resistance now at $13.75 and then stronger resistance at $15.30

What It Means: Though I am fairly optimistic about the growth prospects for emerging markets in 2012, there are no strong signs that aluminum stocks have bottomed. It would take a few consecutive weeks of higher prices to improve the technical outlook.


How to Profit: I see no reason to bottom-fish in aluminum stocks at this time, but the double-bottom formations should be monitored, because if they are completed, it should provide higher-probability entry points in these stocks.


Tags: AAACHRIO
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.