Defense Stock Dropping Like a Dud

by Serge Berger | August 4, 2011 1:00 am

Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free weekly newsletter[2].

Oshkosh Corp. (NYSE:OSK[3]) designs, manufactures and markets specialty vehicles such as defense trucks, access equipment, emergency vehicles and more.

In early July, billionaire investor Carl Icahn disclosed that he holds a 9.5% stake in the company. As usual in such cases, Icahn plans dialogues with management about increasing shareholder value. This would be a positive, and it was perceived to be so for exactly one day, but the stock is down almost 20% since the announcement, and 30% from July 1. Furthermore, roughly 50% of the company’s sales go to theU.S.government, and the recently announced defense spending cuts don’t bode well forOshkosh, at least not in the medium term.

On the weekly chart dating back three years, note the series of lower highs and the major support zone (blue line) around $24.50. That support level broke earlier this week.

OSK Weekly Chart

On the daily chart dating back to January 2011, note the large gap down in late July and the oversold reading on the slow stochastics indicator currently. Despite the longer-term weak trend from the weekly chart above, it is now possible that the stock bounces some, possibly even into the gap area from late July.

OSK Daily Chart

The trade I see setting up here is to start shorting the stock on any bounce to the $24-$25 area. First profit targets can be set near $20, followed by $18, with initial stops depending on where you enter the trade, but no higher than $26.50.

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