The stock prices of aerospace and defense companies have moved sharply higher from the March low, which is a theme that is not uncommon. However, with that said, recent price action near major levels of support combined with the high barriers of entry required to compete make this sector one to watch over the weeks ahead. In this article, we'll take a look at some sample charts from across the sector and try to determine how traders will be looking to trade the move higher.
SPDR S&P Aerospace & Defense ETF (XAR)
Traders often turn to popular exchange-traded products such as the SPDR S&P Aerospace & Defense ETF (XAR) when looking to analyze niche sectors such as defense. As you can see from the chart, the price has been trading within a period a consolidation, as shown by the horizontal trendlines, ever since stabilizing from March's selloff.
Traders will also want to note that the break higher in May sent the price above the key resistance of the 200-day exponential moving average, which is an indicator that suggests the bulls are back in control of the long-term momentum. Bullish traders will most likely look to enter orders as close to $93.84 as possible in order to maximize the risk/reward. Some traders may want to remain on the sidelines a while longer to see whether the 50-day moving average will cross above the longer-term average, which would likely act as a catalyst for a flood of buy-stop orders.
Axon Enterprise, Inc. (AAXN)
As the top holding of the XAR ETF, Axon Enterprise, Inc. (AAXN) will likely be on the radar of many active traders. As you can see from the chart below, the price has recently broken above the resistance of a triangle pattern on higher-than-average volume.
The break above $90 suggests that the bulls are in control of the momentum, and many are now setting their target prices near $130, which is equal to the entry point plus the height of the pattern. From a risk-management perspective, stop-loss orders will most likely be placed below one of the identified support levels, depending on risk tolerance and investment horizon.
Mercury Systems, Inc. (MRCY)
Another top holding of the XAR ETF that will likely capture the attention of active traders is Mercury Systems, Inc. (MRCY). As you can see below, the stock price is in close proximity of the 50-day and 200-day moving averages, which suggests that the risk/reward is in clear favor of the bulls.
Recent price action has also triggered a bullish crossover between the long-term moving averages, which is a common buy signal that is used by followers of technical analysis to signal the start of a major move higher. Stop-loss orders will likely be placed below $77.29 to protect against a sudden shift in sentiment or underlying fundamentals.
The Bottom Line
The majority of asset classes have bounced sharply from the March lows. As we discussed above, one group that could be of specific interest over the weeks and months ahead is aerospace and defense. Charts across the sector are showing lucrative risk/reward setups due to support from long-term moving averages and major trendlines.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.