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Short Trader: DRS Bulls Under Siege

Even on good news, shares of the defense contractor sold off.

DRS Technologies


, a defense company, makes propulsion systems and various other electronic products related to the military and intelligence communities. The defense sector is one of the sectors that I believe will do well over the next year or two. However, being in the right sector is sometimes not enough to keep a stock moving higher.

That seems to be the case with DRS. On Wednesday, the company announced that it had won a U.S. Navy contract worth about $20 million. In response, the stock sold down more than 1%. That prompts the question: If a $20 million contract is not enough to entice buyers to pay up for the stock, then where is the next catalyst, and when will current stockholders become impatient enough to sell their shares?

Let's look at the chart.

After shares of DRS fell below their 50-day moving average in February, notice how the stock has consistently bounced at about $51.50 over the past month or so. Each time the stock reached this level, buyers would start bidding the stock higher again.

However, there has been no follow-through, and the pullback looks different this time. First, the stock traded lower on good news. The market had apparently already factored the contract into the stock price, and DRS sold off on the news. Second, trading volume has been picking up as the stock declines.

At this point, we've got to expect the stock to bounce once again. After all, that's what has been occurring for the past month, and history typically repeats itself until it doesn't.

DRS Technologies (DRS) -- Daily

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So a suggested short entry would be on a move down to around $51.25. If the stock falls that low, it's likely that all the buying in DRS has dried up.

If that move down occurs, the next logical support level would be around $47 or so. Once the trade is entered, try putting a buy stop up around $52.60. If the stock moves that high, you probably don't want to be short.

Shares closed at $51.57 Wednesday.

Updates on Previous Picks

  • Heelys (HLYS) : This short idea is working well, with the stock very close to the target of $27.25. Because of Heelys' weakness in the face of a very strong market, I expect this stock has more downside to go. So the new price target is $24.75, with an adjusted buy-stop of $29.95. Shares of Heelys closed at $27.79 Wednesday.
  • DuPont (DD) - Get DuPont de Nemours, Inc. Report: This stock has been on the watch list over the past week, with a suggested entry of $50.67. In light of the stock's weakness, let's adjust that entry to a move up to $50.10. Once the position is opened, the buy stop should be set at $52.10. That gives a very tight leash on this short. DuPont closed at $49.56 Wednesday.

At the time of publication, Fitzpatrick held no positions in the stocks mentioned, although holdings can change at any time.

Dan Fitzpatrick is the publisher of

, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback;

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