This sector is on thin ice⦠[TradeSmith Daily]( A Trade for Peace
By Michael Salvatore, Editor, TradeSmith Daily Which market sector would you most expect to have made a new high between February 2022 and October 2023? Youâd have two big reasons to pick the defense sector… February 2022 saw the Russian invasion of Ukraine, a conflict with hundreds of billions of U.S. spending behind it and no clear end. And just one month ago, war erupted between Israel and terrorist group Hamas. Wars are, unfortunately, good narrative drivers for defense stocks. The more conflict in the world, the more defense companies can fill their coffers. And the narrative is sound. The iShares U.S. Aerospace and Defense ETF (ITA) rose over 14% in the month after Russia invaded Ukraine. And since the Hamas attacks on Oct. 7, ITA is up 12%. But youâd be wrong to think defense stocks are making new highs. In fact, theyâre lower than they were before the pandemic… and facing stiff resistance.
Per the [TradeSmith Analytics dashboard]( ITA is the single most overbought sector in the market, despite being a relatively weak performer over the past several years. This looks to me like a case of the Wall Street narrative machine getting out of hand again. So letâs dive into ITA and see what the most likely next move is for this overly hot sector… And at the end of todayâs essay, Iâll show how you can use [TradeSmithâs in-house A.I. system]( to figure out the best way to trade ITA right now… RECOMMENDED LINK [R.I.P. for the American Dream? (Surprising answer inside...)](
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Letâs zoom in to the last year of ITA price action…
First, letâs unpack the colored horizontal price levels Iâve marked on the chart. Near the top of the chart, the red horizontal line marks the pre-pandemic high for ITA, which it has yet to close above. We can see that itâs acted as a powerful resistance level even in 2023, with ITA rejecting off of it no less than four times since the start of the year. Below that, the yellow level is what Iâd call local support for ITA. Itâs a level where traders have scooped up shares in June, July, and earlier this month. The two green lines below that are even stronger support, as traders have bought at those levels aggressively throughout the past several years. This level is our rough price target for ITA, should it roll over. And ITA looks ready to roll over. Itâs failing to follow through on a new high despite being wickedly overbought on the Relative Strength Index (RSI) indicator (the purple line on the bottom half of the chart). In fact, the RSI is at its highest level since the massive COVID bounce that hit nearly all sectors in June 2020. The fact that ITA didnât participate in Tuesdayâs face-ripping stock market rally is also telling. Investors are shunning the sector in favor of more politically neutral bets, despite ongoing war on two major fronts. And news out this morning, of Congress passing a stopgap funding bill to prevent a government shutdown until January, notably leaves out additional aid for Ukraine and Israel. Itâs important to note that government aid for these two conflicts doesnât necessarily or immediately turn into profits for companies in the defense sector. But media narratives — like the U.S. government backing yet another conflict with untold billions of dollars (or not) — are what drive capital into the market, one way or another. All of this tells me we should expect some amount of selling in ITA over the next several days to work off these overbought conditions. I would first look for ITA to trade at its local support level, around $111.50. Think of it as a âtrade for peaceâ — betting on defense stocks to lose their luster. But I want to bring in one more piece of evidence that you should always check before you place a trade… RECOMMENDED LINK [Urgent Briefing: Get on the Right Side of the Massive, $15.7 Trillion Wealth Transfer](
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[Details HERE...]( What AI Recommends for ITA
Earlier this year, TradeSmith introduced An-E. You can think of it as ChatGPT for the stock market, only instead of [writing you poetry using data from 2021]( An-E helps you forecast market moves and pinpoint the best strategies to trade them. Recently, An-E has gotten an update with a brand-new options trading algorithm thatâs included for [Predictive Alpha Options]( subscribers. This tool scores tickers from 0-100 for any stock or ETF in the market. The higher the score, the more bearish the strategy our tool recommends. I plugged ITA into this new tool yesterday morning. As I write, ITA scores an 84 on our options rating…
That puts it in Zone 6, all the way at the right of the scale. At this level, the tool recommends we buy speculative puts on ITA, buy protective puts to hedge against price declines if we own the stock, or write covered calls against our holdings at high strike prices, with the assumption they wonât be exercised. We can also see that ITA has climbed higher and higher into that zone over the past month and change. I highlight this tool for two reasons.
- To show the slew of strategies you can use to profit on bearish trends in individual stocks and sectors.
- To demonstrate the incredible power of trading with TradeSmithâs predictive toolset.
As I mentioned recently, I believe [learning to trade will be the most important skill of the 2020s](. Thatâs not to say itâll be easy. Thereâs a steep wall to climb before anyone can call themselves a knowledgeable trader, no less a competent one. Using TradeSmithâs tools, however, makes that process much simpler. Itâs like the difference between free-climbing that wall with a load of rocks in a backpack… and being strapped to rock-climbing superstar Alex Honnold. I highly suggest you [check out what this tool is capable of right here with Predictive Alpha Options](. Recently, our research has uncovered an unusual âAlpha Spikeâ with a 96% hit rate. These spikes give you the opportunity to generate substantial income from the market — sometimes thousands of dollars — using a little-known but incredibly powerful trading technique. [You can get the full story here.]( And as for ITA, I would recommend at the very least avoiding shares of it unless it hits the recent local support of $111.50. To your health and wealth, [Michael Salvatore]Michael Salvatore
Editor, TradeSmith Daily P.S. If youâre just starting out trading and want to first see An-E's predictive power before jumping into options, [go right here]( and check out the launch presentation from earlier this year. Itâll show you how An-E's capable of forecasting the forward 1-month performance of any stock or sector with stunning accuracy. Thatâs less than half the cost of a ChatGPT Plus account… and with a whole lot more valuable investment insight. [Get the full details right here.]( Get Instant Access
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