How to Trade Defense Stocks on Iran Tensions

Buy General Dynamics on weakness to its quarterly value level at $164.50. Reduce holdings on Lockheed Martin on strength to monthly and annual risky levels at $418.87 and $421.82. Reduce holdings on Northrop Grumman on strength to annual and semiannual risky levels at $383.90 and $385
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Defense stocks General Dynamics  (GD) - Get Report, Lockheed Martin LMT and Northrop Grumman  (NOC) - Get Report popped Friday on the news that a U.S. military strike killed a top Iranian military commander. The extent of the gains was different for each stock and the weekly charts below assess each profile.

Buy GD on weakness to its quarterly value level at $164.50 as its weekly chart is negative. 

Reduce holdings on LMT on strength to monthly and annual risky levels at $418.87 and $421.82, respectively. 

Reduce holdings on NOC on strength to annual and semiannual risky levels at $383.90 and $385.00, respectively.

For an analysis of the drone attack and the backdrop information read “Defense-Contractor Shares, Including Lockheed, Raytheon, Take Off After U.S. Drone Attack.” Then review these weekly charts. 

The Weekly Chart for General Dynamics

Buy Weakness on General Dynamics

Buy Weakness on General Dynamics

Courtesy of Refinitiv XENITH

The weekly chart for General Dynamics is negative with the stock below its five-week modified moving average at $180.02 and below its 200-week simple moving average or “reversion to the mean” at $181.92.

The 12x3x3 weekly slow stochastic reading is projected to decline to 42.36 this week down from 44.70 on Dec. 27.

The horizontal lines from the bottom up are its quarterly value level at $164.50, its monthly pivot at $179.91 and semiannual and annual risky levels at $216.33 and $228.22, respectively.

Trading Strategy: Buy weakness to the quarterly value level at $164.50 and reduce holdings on strength to the semiannual and annual risky levels at $216.33 and $228.22, respectively.

The Weekly Chart for Lockheed Martin

Reduce Holdings on Lockheed Martin on Strebgth

Reduce Holdings on Lockheed Martin on Strebgth

Courtesy of Refinitiv XENITH

Lockheed Martin traded as high as $415.00 before 11 a.m. ET on Friday. The stock is up 5.9% in 2020 and is in bull market territory 72.1% above its Dec. 26, 2018 low of $241.18. The stock set its all-time intraday high of $415.00 this morning.

The weekly chart for Lockheed is positive with the stock above its five-week modified moving average at $392.86 and above its 200-week simple moving average or “reversion to the mean” at $303.31.

The 12x3x3 weekly slow stochastic reading is projected to rise to 77.27 this week up from 71.92 on Dec. 27.

The horizontal lines from the bottom up are its quarterly value level at $361.99, its semiannual pivot at $404.26 and monthly and annual risky levels at $418.87 and $421.82, respectively.

Trading Strategy: Buy this stock on weakness to its quarterly value level at $331.87 and reduce holdings on strength to monthly and annual risky levels at $418.87 and $421.82, respectively.

The Weekly Chart for Northrop Grumman

Reduce Holdings on Northrop Grumman on Strength

Reduce Holdings on Northrop Grumman on Strength

Courtesy of Refinitiv XENITH

Northrop Grumman traded as high as $375.63 before 11:00 a.m. ET Friday. The stock is up 9.2% in 2020 and is in bull market territory 68% above its Dec. 26, 2018 low of $223.61. The stock is just 2.2% below its all-time intraday high of $383.89 set on Sep. 26, 2019.

The weekly chart for Northrop is positive with the stock above its five-week modified moving average at $353.58 and above its 200-week simple moving average or “reversion to the mean” at $281.65.

The 12x3x3 weekly slow stochastic reading is projected to rise to 33.00 this week up from 25.44 on Dec. 27.

The horizontal lines from the bottom up are its quarterly value level at $331.87 with annual and semiannual risky levels at $383.90 and $385.00, respectively. Its monthly risky level is above the chart at $400.49.

Trading Strategy: Buy weakness to the quarterly value level at $331.87 and reduce holdings on strength to its annual, semiannual and monthly risky levels at $383.90, $385.00 and $400.49, respectively. 

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were input to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the last nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an “inflating parabolic bubble” as a bubble always pops. I also call a reading below 10.00 as being “too cheap to ignore.”

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.