Defense & Aerospace Set to Outperform?

One sector I’ve been keeping my eye on relative to the S&P for a few weeks now is Aerospace & Defense. I am specifically speaking to the iShares ETF $ITA. Top holdings in ITA are United Technologies, Boeing, Lockheed Martin, General Dynamics, Raytheon, Northrop Grumman, etc.

Take a look at the chart below:
Screen Shot 2016-08-21 at 4.21.07 PM.png

ITA has clear resistance relative to the S&P defined above going back to 2014. We were able to close this week with a nice solid green candle above this resistance. With a rising 200 day moving average along with a relative strength (RSI) breakout, I like the look of this going forward. My favorite setups are those which have clean and clear defined resistance at all-time-highs. This fits my criteria.

We have failed here previously so I am waiting to see how we holdup up here. I can think of a few reasons why Defense & Aerospace stocks may start to outperform, but that is not part of my method to analysis.

I like to dig through the holdings of ETFs to see which components are the leaders and laggards. I have done that so next up we have a few charts I like within this sector.

First Up: Lockheed Martin (LMT)
Screen Shot 2016-08-21 at 4.29.29 PM.png

LMT has been a beast since 2013 and the chart relative to the S&P is almost identical. What caught my attention is the monster volume flowing into this name over the past few weeks. This has also taken place post its most recent earnings call. LMT’s RSI brokeout and is now retesting the trendline. I want to see this hold. I also love that LMT has not been oversold on the weekly since 2009.

Note: I am using the 30 week moving average here and on most of my charts.

Continued pullback into the 30wma will be a great risk/reward entry.

A component of ITA that peaked my interest is CW.
Screen Shot 2016-08-21 at 4.36.38 PM.png

As you can see it had a monster volume week, which was followed by a 35% rally. Ofcourse, volume is only one aspect to a trade in my process, but worth keeping an eye on. If it is a sign of what is to come for LMT.

Next up: Orbital ATK Inc. (OA)
Screen Shot 2016-08-21 at 4.38.53 PM.png

This is a longer term chart, and I am using the 30 month moving average. What interests me is the previous touch and bounce from this indicator. The negative divergence worries me, but the large red candle may have been the result already. A long here with a stop below the 30mma (say ~$72) presents a great risk/reward.

Note: Moving averages are arbitrary and should not be used as support/resistance, but they are an indicator of trend and a good way to base whether you get/stay in a position or not.

Next up: Boeing (BA)
Screen Shot 2016-08-21 at 4.43.47 PM.png

I don’t have too much to say about this besides I like that it is basing at multi-year highs and it is a Dow Component. We are also currently in a bearish range. This is one we just want to keep an eye on.

Next up: General Dynamics (GD)
Screen Shot 2016-08-21 at 4.46.56 PM.png

This setup looks great to me: clear overhead resistance (ATHs btw), a rising 30wma, still in a bullish range, and in a potential leader sector. Up and over ATHs I like it long.

Next up: Teledyne Technologies (TDY)
Screen Shot 2016-08-21 at 4.53.03 PM.png

Similar setup to GD above here, but it looks good as well. We have reached overbought signaling a change in momentum. Volume is lacking here, but I want to keep an eye on that. Big volume on a close above ATHs would get me excited.

Next up:Rockwell Collins (COL)
Screen Shot 2016-08-21 at 5.00.20 PM.png

We have a nice consolidation pattern here up at ATHs with momentum staying in a bullish range despite any pullbacks. To me, this says the outcome will more likely be to the upside. Volume is consistent. A break with volume and a upward turning 30wma, I am very interested.

Last but not least: CAE Inc. (CAE)
Screen Shot 2016-08-21 at 5.08.54 PM.png

This is my favorite setup, but is not a component of ITA. We have clearly defined resistance with multiple tests. The more times a level the higher chance it breaks. We have also stayed in a bullish range for a long time along with heavy volume in the beginning of the year. RSI conditions barely pulled back and are staying overbought. Relative strength wise, CAE has been developing a nice rounding bottom relative to the S&P. With a rising 200wma, up and over ATHs I want to be long.

It looks like CAE does operate in the healthcare sector besides its main focus in Aerospace & Aviation, if that affects your decision.

Remember: These are the best looking stocks mid to long term in a potential leading sector that fit with what I look for and pursue.

Let’s see whats to come.

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