The calm before the storm: Three defence stocks on radar

But the second half of 2024 has taken an unexpected turn. With most defence stocks correcting by double digits since their 2024 highs, one question looms large: Have investors lost faith in the defence sector?

Before we jump to conclusions, let us take a moment to breathe. Retracements are a natural part of any market cycle, and no stock ever rallies in a straight line. Yes, many defence stocks have seen steep corrections, but let us not forget that most are still in positive territory for 2024. This dip could be a temporary pause before the next rally.

In fact, a closer look at the charts reveals a pattern of consolidation that savvy investors might want to take advantage of. Let’s dive in.

Also Read: For Bharat Forge, defence a winner, but auto a sore spot

A moving average squeeze: The calm before the storm

While many market participants are nervous about the recent corrections, experienced traders know that retracements often present opportunities.

A stock consolidating between key moving averages, particularly the 50 daily exponential moving average (DEMA) and the 200DEMA, is not something to be ignored. We named this setup a moving average (MA) squeeze, indicating that a stock is in a low volatility phase, getting ready for its next big move.

You might be familiar with the golden cross, a bullish signal when the 50DEMA crosses above the 200DEMA. However, an even more interesting setup arises when the stock price consolidates between these two averages—a sign that it’s potentially coiling up for a breakout.

Let us look at three defence stocks currently in this MA squeeze mode, offering possible trend resumption opportunities.

Also Read: Adani’s resurgence: A $5-7 bn war chest for cement, ports, defence acquisitions

Hindustan Aeronautics Ltd: Poised for a take-off

HAL is a titan in India's aerospace industry. It produces fighter jets, helicopters, and defence aircraft for the Indian armed forces. With a robust order book and a growing export portfolio, HAL has been a major player in India's defence modernisation.

Despite its strong fundamentals, HAL's stock has corrected by approximately 27% from its all-time high of ₹5,659 to ₹4,120, finding support near its 200DEMA around ₹4,050. But don't let this correction fool you. The stock is currently trading between its 50DEMA and 200DEMA, indicating an MA squeeze.

If you study the chart closely, HAL is building energy, ready for its next leg up. A close above ₹4,570 (50DEMA) could trigger a resumption of the bullish trend, offering a potentially excellent entry point for those who wish to ride the defence sector's long-term growth story.

Bharat Electronics Ltd: Reversing the trend

BEL is a key player in India's electronics and radar systems for defence applications. Its products, which range from radars to electronic warfare systems, are critical to India's military capabilities. Despite its stellar reputation, the stock has been under pressure recently.

On the daily chart, BEL follows a lower high and lower low structure, signalling a bearish trend, according to the Dow Theory. After correcting over 20% from ₹334 to ₹265, the stock shows signs of a bullish reversal.

BEL is also in the MA squeeze zone, consolidating between its 50DEMA and 200DEMA. A breakout could be on the horizon on a close above ₹290 (50DEMA) and ₹295 (previous high), confirming a potential trend reversal and suggesting the bullish trend is resuming. Keep this stock on your radar, as it may soon reward patient followers.

Also Read: Paras Defence hits upper circuit twice, but analysts are unsure about the stock

Bharat Forge Ltd: Auto-defence synergy ready to break out

Bharat Forge is a diversified engineering company with a strong presence in both the automotive and defence sectors. Known for its cutting-edge manufacturing capabilities, the company is a critical supplier of defence components ranging from artillery to armoured vehicles.

Over the past three months, the stock has been consolidating in a tight range, reflecting a calm before the storm. On the daily chart, the stock price is caught in an MA squeeze, trading between its 50DEMA and 200DEMA. The stock has respected its recent low of ₹1,425, close to its 200DEMA of ₹1,422, showing early signs of a possible reversal.

A close above ₹1,555 (50DEMA) could signal the start of a new uptrend. With both the automotive and defence sectors showing growth potential, Bharat Forge might be ready to break out of its consolidation phase and resume its bullish journey.

Defence stocks on the radar

The recent corrections in the defence sector may have spooked some investors, but the long-term outlook remains intact. These stocks are in the midst of MA squeezes, consolidating and gearing up for their next potential leg up. Whether it’s HAL, BEL or Bharat Forge, these companies remain in the long-term bullish trend, and their short-term charts suggest they are getting ready to resume their bullish trends.

For more such analysis, read Profit Pulse.

For readers looking to capitalize on the growth of India's defence sector, now may be the perfect time to keep these stocks on your radar. After all, patience is not just a virtue; it’s often rewarded with profits from the right stocks.

Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.

As per Sebi guidelines, the writer and his dependents may or may not hold the stocks/commodities/cryptos/any other assets discussed here. However, clients of Definedge may or may not own these securities.

Brijesh Bhatia has over 18 years of experience in India's financial markets as a trader and technical analyst. He has worked with the likes of UTI, Asit C. Mehta, and Edelweiss Securities. Presently he is an analyst at Definedge.

Disclosure: The writer and his dependents do not hold the stocks discussed here. However, clients of Definedge may or may not own these securities.