With the US move into the Strait of Hormuz this week, suddenly defense stocks might be a place to track. I want to highlight a few charts here.
First of all, L3 communications has recently surged. Try to find a three or four-day pullback to get in this one. If it returns to the breakout level around $210, that could mark a nice entry. I wouldn’t chase it, but try to find a week where price action softens and use a stop underneath.
The SCTR is a ranking system for strong price movement. The stock just recorded the strongest price move in three years. Something is going on! The relative strength in purple is breaking to new highs, so the stock price movement is starting to outperform the $SPX. That attracts new investors and portfolio managers.
The full stochastic is strong and can stay up here a long time on a weekly chart. The price action broke out two weeks ago on strong volume but the stock keeps marching higher. Notice the surge on the PPO momentum indicator back in 2016. This looks similar. Again, interested investors would like to find a small pullback to calculate a stop and risk.
Northrup Grumman (NOC) has recently started to accelerate. Northrup has been consolidating for a year after a 4-year run. The stock looks to be setting up for another run now. The SCTR is moving into the top 25%. Relative strength has broken the down trend and is now hitting six-month highs. That can attract investors! I like the fact that the momentum indicator in the bottom panel, the PPO, has moved back into positive territory after a year in negative territory. That is a very positive sign. It must continue to accelerate from here. Stocks that stall near zero on the weekly PPO chart can thrust lower. Just make sure the stock holds previous lows as it goes through this chart area.
Lockheed Martin is set up for a test of the previous highs. This usually means the stock needs to consolidate a little as it tries to find new buyers willing to pay higher prices. The SCTR has just surged to a high level above 75. This is very good. One common thing that happens is a stock surges into this higher level of SCTR, pulls back, then surges again. This secondary surge is when new investors really start to buy up the stock. Sometimes we get this secondary chance, other times the stock just keeps launching. The price action has consolidated for 4 weeks and the stock looks like it wants to break out of the consolidation now.
Raytheon is not set up as nicely, but the stock is pressing up against the trend line after building a base. The SCTR should surge above 50 if the stock is going to get some price action. Until the downtrend in relative strength is broken in the purple area chart, I would hold off owning the stock. One of the nice places to scan for on weekly charts is a full stochastics indicator trying to bounce off 50. We don’t see that yet, but based on the other large caps in the group, watching this one for a move higher to get on board could be timely.
Lastly on Raytheon, if the PPO rolls over into negative territory after bouncing up to zero, this would be a big signal to avoid the stock until a better buy signal sets up. If the PPO starts to surge above zero and follow the lead of the other defense stocks above, this is a nice place to enter.
The last stock is General Dynamics. The chart is not great, but it is also near an inflection point where it could turn bullish with just a few good weeks of price action. The trend lines on the chart would have to start being tested or broken to change the bearish tone of the chart. The one I really want to see broken is the two-year downtrend on the momentum (PPO). If that breaks, this would be a nice entry as the stock starts changing its behavior. Until the momentum downtrend breaks, I would avoid the stock.