A defense stock down big lately is primed for a turnaround. How to play a comeback with less risk
Northrop Grumman (NOC) has suffered an eye-popping 30% collapse in under two months. While a haircut of this magnitude is sure to grab any trader’s attention, a massive drop does not automatically guarantee an immediate bounce. Attempting to catch a falling knife is a quick way to drain your account. Finding the actual bottom requires patience and a strict reliance on objective technical indicators to identify the correct entry point. The tools I am using to stalk this NOC set-up are the exact same metrics that power my fully automated, rules-based trading platform, Maya . To time this specific entry, I am looking at how two distinct indicators interact: 1. Accelerated MACD (5, 13, 5): The Early Radar – I prefer this tighter MACD setting because it acts as an early warning system, highlighting momentum shifts before the rest of the market wakes up. On April 29th, this indicator fired off a clear bullish crossover, signaling that the aggressive selling pressure was finally starting to stall. However, taking any single indicator as gospel is a mistake. Entering a trade purely on an early MACD signal can trap you in a losing position for weeks while the stock continues to drift lower. It is a watchlist trigger, not a buy signal. 2. Relative Strength Index (RSI): The Execution Trigger – This is where the actual trade setup is completed. NOC’s RSI plunged below the 30 level on April 20th, officially dragging the stock into oversold territory. This is the exact environment where mean reversion setups emerge, but the golden rule remains: we never buy simply because a stock is oversold. We have to wait for the RSI to pop back above 30, proving that buyers have actually stepped in to defend the price. That definitive proof finally arrived on May 18th. By layering these two indicators, the true value of the system becomes clear. The RSI kept us safely on the sidelines for nearly three weeks after the initial MACD crossover, preventing a premature entry and allowing the true floor to form before we risk any capital. The Trade Set-up: NOC 555-560 Bull Call Spread With NOC currently hovering right around $555.58, my strategy is to deploy an At-The-Money (ATM) bull call spread. To construct this, I am simply bracketing the current price action. That means buying the In-The-Money (ITM) call just beneath the current trading level and simultaneously selling the Out-Of-The-Money (OTM) call directly above it (for example, utilizing the 555/560 strikes). As is typical with these tightly wrapped ATM setups, you can generally expect to get filled for a limit price of around $2.50. That specific price point makes position sizing and risk management incredibly straightforward. If you decide to scale into a 4-contract position, you are putting exactly $1,000 on the line for the opportunity to capture a matching $1,000 in profit. As long as NOC manages a modest push past that upper strike (the $560 mark) by the expiration date, this setup allows us to literally double our risked capital in less than 30 days. Considering how deeply oversold this defense giant became, combined with the sheer upward force of the broader market, asking for a minor $5 to $10 drift higher is an extremely achievable target. Here is my exact trade setup: Buy $555 call, Jun 18th expiry Sell $560 call, Jun 18th expiry Contracts: 1 Cost: $250 Potential Profit: $250 — Nishant Pant Founder: https://tradewithmaya.com/ Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: None All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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