[AA] update.

Backlink.

A reader asked a question in the comments of another post about AA so I'll do an AA update.

First, know this: I model that AA is going to be $18 in 18 months.  The worm has turned on this company because monetary inflation is coming.  AA will do very well in monetary inflationary times.  Things that are bought with cash will go up in price because of monetary inflation (inflation of the fed's monetary base).

At the same time we will experience credit deflation.  Things which are bought with credit will go down in price because interest rates are rising (head wind to demand) and less credit is being made available due to rising defaults on debt (credit deflation = headwind to credit supply).  When both supply and demand of credit go down, where is the money going to come from to purchase new houses, fancy cars, and other things that are normally bought on credit?

The consumer will demand more and more out of the producers of these items before they will decide to purchase.  I myself am driving an old truck waiting for deflation driven "more and better for cheaper" before I upgrade.   This is typical deflation: more features at a lower price.  This is what the federal reserve is trying to "save" us from.  This is the con of inflation!  The natural order of things is deflation and when you don't get it, someone is stealing the delta (using the con of fiat currency an fractional reserve banking).

Because of this, Ford is going to aluminum chassis cars in order to save up to 750 lbs on their vehicles.  They are not doing this because they want to.  They are doing it because they know that credit strapped buyers are demanding more.  Less weight = higher gas mileage.  When Ford has better specs because of the use of Aluminum, everyone will have to do it.  This is why deflation is good: it makes the best and brightest work to their fullest in order to keep their lofty positions.  It does not allow laziness or complacency which are all possible and probable when the credit is flowing and money is easy.

In order to combat its credit deflation problem, Ford is going to demand new products from Alcoa and this is going to pump Alcoa's bottom line.  You see, Alcoa does not sell aluminum on credit!  Ford will have to pay what is essentially cash.  As the fed waters down the monetary base, Alcoa will raise prices.  This will skyrocket AAs earnings, reduce their debt burden and generally result in good things for AA investors who buy in at these levels.

But AA has now had 5 waves up from the bottom (which I called almost to perfection in these pages based on my EW model).  And 5 waves up mean a healthy next move is 3 waves back, A-B-C.  It is very typical that the first retracement following the first wave up out of a long bear market is a very strong "Vee" 2nd wave back down.  Why?  Because people are used to the asset never being able to hold a rally.  They do not understand why things move up or down, they just know fear and greed.  Most people have no system like EW to guide them.  They go by gut feel (huge mistake!).  They even mock those of us that do use charts to better our odds, saying that we are throwing chicken bones and divining the future from them.

I any case, when AA breaks down below the top rail of the ending diagonal, there will be fear that AA is heading to new lows.  Remember, the broader markets are modeled to be plummeting as well at that time so in the minds of the herd members who do not understand wave theory, why should AA be any different?  This is why 2nd waves tend to be very deep vee retracements.  I think that the 61.8 is most  likely but it could go all the way back down to the blue up-sloping line around $8.  The shape of the retracement will help me decide whether I model 61.8 as the bottom or not.

The chart could also go sideways for awhile from here forming a 4th wave with another little spurt to $13 before coming back down.  That would be very bullish in the longer run but I would sell such action instead of buying it.  For those who only move based on confirmations (a very smart strategy for most people), the key is a break below that top green rail.  If that happens, expect pain to ensue.

By the way, I do not post all of my trades in these pages so there should never be any assumption as to whether I am currently in a stock or out.  For example, I bought JCP at the open recently but got stopped out as planned.  I did not post that I got stopped out.  I do not intend to post every single move.  People have no idea how much work all of these posts are to do.  At some point I will probably open a paid trading advice web site but only after I gain more readership in this free, non-ad supported blog.  I am not in a hurry as I have a day job but someday I might decide to do this full time.