Futures SOS with DJUSAL and AA

Discussion in 'Commodity Futures' started by oopsies, Dec 20, 2017.

  1. oopsies


    Hello, I hope this is in the right forum. To begin, I don't trade futures - I trade equities only. Unfortunately, due to a specific trade, I got unwittingly pulled into aluminum futures. I'm trying to figure out my next move but due to my lack of experience in trading futures, I could really use a second opinion. As of now, I am stuck with a losing position in AA.

    I have been trading Alcoa (AA) which is a manufacturer/miner of bauxite, aluminum, and alumina. All along, I thought I was trading based on the company's fundamentals and its price action. Stupid me. I should've remembered that they had a reverse stock split back in November 1, 2016 for the sole purpose of getting AA to match the movements in DJUSAL. I remembered too late and what I am effectively doing is trading aluminum futures even though I have a position in AA.

    The last couple days has seen quite a movement in DJUSAL. I am looking at the chart (attached 1 year weekly chart) and I see a potential retest of resistance (or "bounce" from the downtrend). However, for the last few weeks after the initial "drop", it went into a slow consolidation. Although the consolidation looks like a downward slope, the actual pricing inside the candles indicates it was moving more horizontally than sloped. In the attached image, it's a 6 month daily chart. The two red lines represent the rough zone of resistance.

    I also checked other stocks that use aluminum - such as Boeing, Lockheed Martin, etc. I even checked CAT, HD, LOW as well as the major airline stocks. They all appear to be doing well and most of their prices are in clear uptrends. I'm thinking that these companies buy futures contracts years in advance so that they can hedge their product prices (like airplanes, boats, rigs, trucks, etc.). I also read up on China's aluminum smelters, their attempt to curb pollution. I even considered tariffs from Trump's more-protectionist stance on global trade. And of course, the recent announcement on U.S. crackdown on Chinese aluminum imports.

    On the matter of price action, now that I am looking solely at DJUSAL, I'm thinking that it simply did not have the strength to push lower. If it were a more "bearish" move, I would have imagined that the consolidation period would be much shorter, the retest happening earlier, and then a bounce off of resistance to trend lower. But instead, it's a long horizontal consolidation period. Coupled with the fundamentals in the previous paragraph, I'm inclined to think that this retest is more than likely to breakout and move in a clear upward direction.

    My questions:
    a) Is this a fair analysis or am I missing something important that I didn't consider due to my lack of experience in the futures market?
    b) Is this a fair conclusion or would you end up with a different conclusion?
    c) I am thinking of either getting out or shorting around $153.37. That's my key spot. But I'm second-guessing myself and I don't know what to do.

    Hoping someone can shed some light on this for me!
  2. maxinger


    I presume you longed the futures and you are doing swing trading.
    I will talk about the technical aspect.

    around 2007, Al dropped significantly.
    since then, Al has been in the range from about 50 to 150 for 1 long decade.
    That is its comfort zone, and it prefers to be in comfort zone for many many years unless there is some major trigger / event to move it out of comfort zone.

    support /resistance line.
    do not take it as a thin line. take it as a zone / band / region.

    if you see the chart, after price breaks out of 147, Al quickly go back into its comfort zone.
    Is it going to break out again? No idea.
  3. Metamega


    Think you answered your own question. You based the trade of fundamentals and found out it follows aluminum spot prices. In my experience most miners track prices of their corresponding resource. Gold miners be a good example, gold rallies, the miners rally, some more then others.

    So since you based the trade off the companies fundamentals, not the fundamentals of aluminum, I’d scratch the trade and move on.

    Losing trades happen. Trying to come up for a reason for every chart to be long or short is a good way to get chopped up.

    You need a setup/trigger to get in and a trigger to get out. In my opinion if you don’t your just flipping a coin, which can have periods of profitability but hard to keep those profits in the long run.
  4. oopsies


    Thank you both for responding. What a painful, painful day with this trade. Sigh, I had no choice. It broke through all resistance. So I'm out. For future reference though, any idea what happened? Or is the answer the same as it would be for any other stock?