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Up 21% in 5 days, is Alcoa still a ‘buy’?

Tuesday, 21 Jan 2014 | 6:44 PM ET

With shares up 21% in about a week, has Alcoa become the new Street darling? Or is it destined to decline?

"That's an amazing move," noted Jim Cramer.

And one that's been a long time in coming for Alcoa shareholders. Before the recent advance Alcoa had been stuck in the mud for almost 18 months.

Looking at fundamentals Cramer thinks the advance makes all the sense in the world.

"Alcoa's been growing its higher-margin value-added businesses, where it makes things like aluminum fasteners for airplanes, and at the same time, the company's been shutting down its more expensive facilities in order to become a lower cost aluminum producer," he said.

Those developments bode well for bulls.

However, in the stock market, they say price is truth and until quite recently Alcoa had been effectively dead money.

That isn't bullish.




LWA | The Image Bank | Getty Images

In cloudy circumstances such as these Jim Cramer often turns to technical analysis for further insights.

According to Ed Ponsi, managing director of Barchetta Capital, at least 4 chart patterns suggest the rally is sustainable.

1. The stock had been trapped in an area of congestion for eighteen months – between $7.70 and $10. However, Alcoa has finally broken well above $10. That's a classic bullish breakout.

2. As the stock broke out, it advanced on high volume. That suggests to chartists such as Ponsi, that a lot of investors share the positive outlook, another bullish sign.

3. Short-term moving averages are all above the longer-term ones. In other words Alcoa's 10-day moving average is above its 20-day moving average, which is above its 50-day moving average, which, in turn, is above its 200-day moving average. For a chartist like Ponsi, that's a very bullish development.

4. The moving average convergence divergence indicator or MACD line is making a bullish crossover. That too is positive.

All told, Ponsi believes Alcoa has plenty of room to run. So how much higher can Alcoa go?

Looking at the weekly chart, Ponsi says that because Alcoa was compressed into such a tight area for so long, there's no real ceiling of resistance anywhere near the stock's current levels.

He adds that if you consider where Alcoa stalled out in 2010 and 2011, the next meaningful area of congestion begins at around $16. And because there's basically a chart-vacuum between where Alcoa is now and $16, he thinks the stock could drive to that level, about 32% of upside in fairly short order.

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"Nobody likes to chase a stock that's been roaring higher non-stop, but this incredible move in Alcoa only really got started last week, and both my reading of the fundamentals and Ed Ponsi's interpretation of the charts suggests to me that the path of least resistance for Alcoa is higher," Cramer said. "In short, I think Alcoa's still a buy, especially if we get even a mild pullback."

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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