This $10 Stock Could Make a Big Comeback in 2016
The warning given by any financial advisor is that past performance does not guarantee future success. However, performance can come in cycles where stocks that did the worst in one year rocket to the top of the charts in the next year.
In what could be one of those “worst to first” comeback stories, aluminum producer Alcoa (NYSE: AA) is poised for a nice recovery in 2016.
After peaking at $17.75 in November 2014, the stock began a year-long slide to a low of $7.81 this November.
As an industrial metals stock, it was caught in a sector-wide bear market. Indeed, most commodities declined significantly over that span as some pundits declared the world to be in a deflationary spiral.
But Alcoa has done this before and recovered. In 2011, shares peaked at roughly the same high and slid to roughly the same low, although they stayed down for two years. The result was a giant trading range, which suggests the next move will attempt to follow previous rallies.
Several technical indicators already point to a tradable recovery on the horizon.
In trading ranges, my favorite momentum indicator is stochastics. The monthly version is low enough to be considered “oversold,” meaning it is stretched to the downside as supply gets exhausted. The weekly version, seen on the chart above, set a higher low in November than it did this summer even as price set a roughly equal low. This divergence between price and indicator often precedes a change in price trend and, in this case, that would be to the upside.
Moving on to the short-term chart, we can see AA creating a base that ran into and then through the declining trendline drawn from February. And late-December trading resulted in a nice breakout through short-term resistance formed over the prior two months.
In an ideal world, there are a few more conditions I’d like to see in place before buying, but many profits have been missed waiting for perfection.
The 200-day moving average is still above acting as a speed bump, if not rally repellant. And on-balance volume while rising has not confirmed that money is flowing into AA at a high rate.
But after several months of base building in a stock sitting on long-term support, and in a sector that has been mostly written off, I think we have enough evidence in place to buy. And that does not include the long-term potential of AA returning to the top of its giant trading range near $18.
However, let’s just focus on the shorter-term trade for now. Assuming the current trendline breakout is valid, it would not be unreasonable to expect a 50% retracement of the decline. This puts the target in the $12.75 area, which would result in a roughly 25% gain. I think this is well within reach given the fact that shares trade at such a low price level and are near the bottom of such a large trading range.
From a sentiment point of view, trader social media site StockTwits gives Alcoa a 95% bullish rating. Normally, extreme bullish sentiment readings would be a contrarian indicator, but I have found that the aggregate of traders on this site gets it right more often than not.
Therefore, I would take a bite out of AA now that tax selling is winding down and hop on for what could be a nice comeback story in 2016.
Recommended Trade Setup:
— Buy AA at the market price
— Set stop-loss at $9.50
— Set initial price target at $12.75 for a potential 26% gain in four months
Note: Before the year is out, take a moment to check out the Top 10 Trades for 2016. They are based on an indicator that tagged many of the best-performing stocks of 2014 and 2015, which went on to return up to 242%. To find out how to access the picks for the upcoming year, follow this link.