Recent missile tests out of North Korea have heightened tensions globally as investors seek safe havens for their investments. Shifts in capital toward currencies such as the Swiss franc or toward commodities such as precious metals have come naturally, but another segment of the market that is moving higher in recent weeks that is worth keeping an eye on is aerospace and defense. In this article, we take a look at several charts that active traders will be watching and try to determine the best trades for the weeks and months ahead. (For more, see: Top 3 Defense ETFs.)
When it comes to seeking exposure to the aerospace and defense sector, most active traders turn to exchange-traded products such as ITA. As you can see from the chart, this exchange-traded fund is trading within one of the strongest uptrends found anywhere in the public markets, driven by one of the strongest fundamental shifts in recent times. More specifically, this sector is in high demand given recent threats of war and will benefit whether or not a single shot gets fired. Active traders will keep a bullish outlook on this sector until the price closes below the combined support of the 50-day moving average and ascending trendline ($165.81). Long positions will likely be added at or near current levels, as ITA now offers a lucrative risk/reward ratio. The recent bullish crossover between the moving average convergence divergence (MACD) and its signal line could be the confirmation that many traders need to trigger a move higher. (See also: The Top Defense and Aerospace Stocks.)
When it comes to aerospace and defense companies, the 800-pound gorilla in the room is Boeing. With a market capitalization of over $140 billion, Boeing offers a scale of operations with which few companies in the world are able to compete. Taking a look at the chart, you'll see that the stock price has been trading within a defined channel pattern for the past few months. Active traders will be keeping a close eye on the dotted trendline because a break above the upper trendline would signal a breakout and likely lead to a major move higher. From a risk management perspective, stop-loss orders will likely be set below either the upper or lower trendlines upon a breakout, depending on risk tolerance. Long-term investors will likely look to set their stops around $210 in case of a sudden shift in fundamentals. (For more, see: How does the risk of investing in the aerospace sector compare to the broader market?)
When it comes to defense contracts within the U.S., there are few companies with the track record of Lockheed Martin. With a market cap of $87.5 billion and a dividend yield of approximately 2.4%, this could be one of the best candidates for a major move higher. Based on the chart below, you'll find that this stock is trading within an uptrend similar to the rest of the sector. The recent consolidation is providing traders with an ideal entry point and is providing a lucrative risk/reward ratio that has not been available since early summer. Active traders will likely look to place an order as close to the trendline as possible and then set stop-losses below the combined support of the 50-day moving average and dotted trendline in case of a sudden shift in sentiment. (See also: 3 Aerospace and Defense Stocks Likely to Outperform.)
The Bottom Line
Strong uptrends in aerospace and defense stocks are commonplace thanks to rising volatility across the globe. Active traders who are paying attention to the charts may want to consider buying given the lucrative risk/reward ratios found across major funds such as ITA and its major holdings. (For additional reading, check out: An ETF for Defense Spending Trends.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.