Don't Ignore This Chart!

Defense Stocks Resolve Momentum Issues, Poised To Lead

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Bullish rotation continues in most areas of the market and we saw a perfect example of that last week in the Dow Jones U.S. Defense Index ($DJUSDN).  The DJUSDN had a HUGE month in February, gaining roughly 6.5% in that month alone.  That swamped the benchmark S&P 500, which gained 3.7% in February.  The problem, however, is that early March price high was a struggle and accompanied by a negative divergence.  Take a look:


The low in December shows a beautiful bounce off price support and truly represents Technical Analysis 101 - prior price resistance becomes price support (green arrow).  Fast forwarding to the latest breakout, you can see the negative divergence (pink lines - higher price, lower MACD) that emerged.  This tells us that as price action moves higher, we're actually seeing the short-term 12 day EMA converge towards the longer-term 26 day EMA, representing slowing momentum.  When this occurs, I look for the rising 20 day EMA to fail to hold as support and additional selling down to 50 day SMA support and potentially accompanied by a MACD centerline test (pink arrows above mark both).  The DJUSDN printed a hammer on both price support and the 50 day SMA, marking a very significant support level as move forward.  Notice also that both price lows - in December and March - occurred as the RSI neared 40 support.  

I'm expecting to see defense stocks regain their leadership role in April.

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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