Stock Just a Few Cents From Triggering What Could be a Double-Digit Sell-off

Defense company Lockheed Martin Corp. (NYSE: LMT) fell sharply following its earnings report on Jan. 24. The stock is now about 10% off its January highs, and flirting with an important support zone near $87. LMT has also formed a bear flag, which if broken, could lead to another 10% drop due to lack of support below $87. 

Before the shares tumbled in late January, things looked good for the stock as it bumped up against its 2012 highs and a potential multi-year breakout point. However, traders that focus on multiple time frames likely would have taken note of the fact that the January top near $96.50 also happened to be marked as an important multi-year resistance point. 

A weekly chart looking back to 2008 reveals that the big sell-off from the 2008 highs to the 2009 lows finally retraced exactly 61.8%, which, of course, is the important Fibonacci retracement number I so often point out in my analyses. Anyone long Lockheed Martin stock and aware of this resistance point likely would have at least trimmed their long position going into the January earnings announcement. 

Lockheed Martin Stock Chart Long Term

If we zoom in on the uptrend that started off the August 2011 lows, we see that the steep post-earnings sell-off not only sliced right through the stock's 50-day and 200-day simple moving averages (zero resistance), but also snapped the 18-month uptrend. I would be remiss if I didn't also point out that all of this came on much higher-than-average volume. 

Lockheed Martin Stock Chart Moving Averages

Since the sell-off occurred, LMT has had a number of days to consolidate sideways, but is far from showing any sort of strength. The stock finally paused its slide near the $86.50 level, which also happens to coincide with the 61.8% Fibonacci support line of the latest rally from June 2012 to January 2013. The 61.8% Fibonacci retracement, from a purely technical point of view, is often the last resort for support in any given price swing. For LMT, a fall below $86.50 would target the June 2012 lows near $80 or below. 

On the chart below, also note the bear flag LMT is now forming during its consolidation phase. Bear flag price targets are measured by taking the distance of the pole (in this case from the January highs to the recent lows) and subtracting that number from the top of the bear flag (currently around $88.25). If we apply this to LMT, we arrive at a price target of $78. 

Lockheed Martin Stock Chart Close Up

If we zoom out a little and focus on a chart dating back to the August 2011 lows, we see that the $78 area coincides with the 61.8% Fibonacci retracement of the August 2011 to January 2013 rally. Simply put, this makes $78 a good price target to keep in mind.

Lockheed Martin Stock Chart Target

The current setup in Lockheed Martin stock gets triggered on a daily close below $86.50, i.e., a breakout of the bear flag to the downside. While $78 is a valid price target as per the above analysis, should the stock move down to $80, greed should be put aside and at least the majority of profits should be taken off the table.

Recommended Trade Setup:

-- Sell LMT short on a daily close below $86.50
-- Set stop-loss at $90.50
-- Set price target at $80-$78 for a potential 8%-10% gain in 4-8 weeks

Advanced Options Trading | Jared Levy | October 18, 2016

Most investors won't be committing new money to stocks given all the uncertainty... but they should absolutely do this.

As the broader market bull looks ready to be put out to pasture, shares of this company are poised for a rebound.

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Premium Content  | Jared Levy | October 21, 2016

Management is taking decisive action to dramatically turn this company and its shares around.