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Stocks trying to hold morning's gains

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Yesterday's morning gains were erased rather quickly and this morning's higher open also saw a setback as the major averages dipped red momentarily, but as I right we're finding the broader- market averages back in the green.

In this morning's "market monitor" we mentioned several upgrades from major brokerage firms in various sectors and found analysts defending some of their favorite sectors as they expound that the bulk of the bad news is out and everything will be fine several months down the road.

One sector that bulls may find attractive is the "aluminum" sector. This morning, Merrill Lynch upgraded shares of Alcan Aluminum (NYSE:AL) to a near-term "strong buy" from "neutral", with the thought that earnings have bottomed and forward earnings should begin to rise. Merrill believes cash flow should also improve as Alcan nears the end of a capital spending program and will benefit from cost-savings initiatives and an improving aluminum price outlook.

The "aluminum's" are considered a deeper cyclical and would be expected to have improving fundamentals during a stronger economic backdrop. Let's see what the MARKET thinks of some aluminum stocks as indicated by their supply/demand charts.

Alcan Aluminum Chart - $1 box

Today's call from Merrill Lynch had me pulling up a point/figure chart of Alcan (AL) to test the analysts thinking. I think he may be onto something and the current bullish vertical count of $55 has my interest. I'd be willing to start out with a 1/2 bullish position and be willing to take heat (downside) to bullish support trend of $33. I like the fact that AL achieved a past bullish vertical count last year that came from a rather large base and broke above 7 tops at $36 and eventually pegged the then bullish vertical count of $48. I also see it took 4 months to achieve that vertical count, so an options trader should NOT be buying February expiration, they should instead be buying time and I like the June $35 (ALFF) currently offered $4.60. Start out slow, then add potential break of triple-top at $39.

An options trader that thinks the options are too expensive might then think the better strategy is to buy the underlying stock and sell some of that premium from time-to-time with a covered call. If you're an IRA (Individual Retirement Account) trader, then this type of stock might be right up your alley.

I also looked at Dow component Alcoa (NYSE:AA) and the point and figure chart is looking bullish there too. We will discuss that chart in later commentary or you can visit www.stockcharts.com and get a free point and figure chart there.

Jeff Bailey
Senior Market Technician
Option Investor

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