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Lockheed Martin Ahead Of Schedule?

10/29/12 12:34:26 PM
by Donald W. Pendergast, Jr.

Shares of Lockheed Martin reached a new multiyear high on Wednesday, October 24, and may be setting up to move even higher.

Security:   LMT
Position:   N/A

Although Lockheed Martin (LMT) shares are still trading well below their all-time high of 120.30 (set back in August 2008), the stock has gained back more than half of its 2008-09 crash losses and has also done very well since making a significant multicycle low on June 25, 2012, rising from 80.14 to 94.96 over the past four months. With a powerful new bullish breakout bar now appearing, is LMT preparing for yet another run higher before a major correction of the June to October rally hits? Here's a closer look now.

FIGURE 1: LMT, DAILY. Price cycles expand and contract over time. In this example, LMT's 20-, 40-, and 80-day cycles may have all bottomed ahead of schedule. Long-term money flow in the stock remains extremely bullish.
Graphic provided by: Sentient Trader.
When scanning for large-cap stocks that have made bullish (bearish) price volume breakouts, one of the first things a trader/investor should look at is the status of the stock's long-term money flow to see if the breakout is in the same general trend direction as that of its 100-day Chaikin money flow (CMF)(100). If the breakout move is in harmony with the money flow trends -- and without obviously opposing divergences with the price trend on the chart -- then you will have located a potentially powerful trading edge, one that can prove especially beneficial for those who swing or position trade on a daily time frame chart.

In the case of LMT, its 100-day money flow histogram has been above its zero line since December 19, 2011, and is currently near its highest reading of the past 10 months. This bodes well for the likelihood of more bullish follow-through in the stock, but to gain even more information that could lead to a trading edge, a look at the current positioning of LMT's key price cycles should be our next task.

On this daily cycles chart (Figure 1), we find that LMT's 20-, 40-, and 80-day cycles are all in remarkably close agreement as to the time/price windows for both its next multicycle low (green box) and its next multicycle high (red box). This is valuable information, but there is a minor problem, which is that LMT may have already completed that three-cycle low ahead of schedule and may not even dip into the green time/price projection zone at all instead setting its sights on the next multicycle high zone.

Remember that individual cycle lengths in a stock can and do expand and contract -- sometimes when you least expect them to -- and this could be one of those times for LMT. How will we know that LMT most likely will not dip into the green zone? There is no sure answer for that question, as the future is unknowable, but if we see LMT break above Wednesday's high of 94.96 on strong volume, then that could be an important confirmation of the validity of the break higher.

Conversely, if LMT suddenly stalls out and/or is suddenly dragged lower by a wide selloff, then we might want to watch for the stock to start moving more forcefully down into the green time/price (TP) projection zone sooner rather than later.

FIGURE 2: CHART DYNAMICS. Of the two large-cap defense-related stocks making new highs, Lockheed Martin has the most bullish long-term chart dynamics.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
Note the twin trendlines on the chart. Both intersect the top portion of the green TP zone and should prove to be significant support on a post-breakout pullback. If these hold, expect a swift resumption of LMT's uptrend into at least the lower portions of the red TP zone. A mechanical swing trading system buy signal after such a reversal could be a great way to get long LMT at that point, but you could also decide to sell an out-of-the-money (OTM), near-term put option instead. See Figure 2.

The November '12 LMT $87.50 puts are selling for about $0.25 per contract as this is written. If you can get at least $0.30 or $0.35 per contract on a decline to either of the two trendlines mentioned, then you have an above-average chance of making money on the trade for these reasons:

1. Rapid daily time decay of the puts, as they have only 21 more days before they lose all time value.

2. A very strong cyclical support area right near the 87.50 strike price of the puts, not to mention at least one other support area near 88.85.

So you can choose to play LMT a couple of ways (swing trade the stock or sell near-term, OTM puts) if you see a dip into the top of the green TP zone, followed by a reversal higher. Be sure to keep your risk on any such trades at 2% or less of your account equity and remember to trade wisely until we meet here again.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the S&P 500 Weekly Forecast service.

Title: Market consultant and writer
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