Defense Sector Overview
A quick trip around the defense sector and its pretty easy to see that the major defense contractors like $LMT, $NOC, $GD, and $RTN have hit some turbulence over the past 4-6 months. Lots of double tops have executed and most of these names now find themselves under their declining 200dma’s and with substantial over head resistance.
Here is a daily chart of $DJUSDN, the Defense Industry group.
It serves as a good snapshot of what is happening. Price below the 200 with downtrend resistance and overhead resistance above. Sure the momentum and RSI have turned up with the recent bounce, but I believe the overhead resistance right here , right now will prove to be too much to overcome. Certainly a tough place to take a shot on the long side in my opinion.
General Dynamics – A clean look at an objective short
The same general picture holds for $GD as mentioned above, but here, at least to my eye, is a clean look at an objective short with a stop near by.
Here’s what I see:
- Price failed at $193, declined to $185, and now is back-testing $193. This is a classic bearish set up
- Overhead resistance at $193 stretches back over a year; seems like a breakout here will be tough.
- Adding to the resistance is the downtrend line just above.
- The $193 back-test also corresponds to a 38.2% Fib bounce; a common reversal point
- Price probed above $193 today and was rejected.
- Relative performance of $GD is simply terrible. Shown in the lower 3 panels, $GD is under-performing both SPY and its peers within $DJUSDN. The group is obviously under-performing SPY as well. Nothing bullish here.
- PPO momentum and RSI are pointed up but I believe the price action and technical set up favor a down move from here.
Conclusion
- Could $GD break out this week? Sure, anything is possible.
- The preponderance of the evidence however, looks bearish to me.
- The fly in the ointment is earnings due out July 25th. I’m not willing to hold options through earnings. That only gives 2 weeks. Not a lot of time.
- But, Given futures are well into the red at 8pm Tuesday night, and with Trump wandering around NATO, 2 weeks might be a lifetime. Tough call.
The Trade
- If I were to give this a shot, I’d target the Jul 27th $192.5 P
- My stop would be $194….a short leash.
- I would close the trade prior to earnings on the 25th.
Disagree?
That’s what makes markets. I’d love to hear your thoughts
Shoot me a note at [email protected] or leave a comment.
Annotated Daily Chart of $GD HERE
