Investors and traders often say that “trend is your friend”. But for most of us who believe in technical analysis, two simple but strong lines on the chart usually show the trend: the 50-day Exponential Moving Average (50DEMA) and the 200-day Exponential Moving Average (200DEMA).
These two moving averages act like the Laxman Rekha on the charts. The 50DEMA shows how the stock trends in the medium term, while the 200DEMA shows it in the long term.
When a stock trades well above both averages, investors feel good, even happy. But as soon as prices drop below them, especially below the 200DEMA, those same investors start to feel uneasy, like a quiet warning bell in the background. These signs are even more important than you might think.
Then comes the scary “Death Cross,” which happens when the 50DEMA goes below the 200DEMA. This is the last sign for many traders that the market is going down. But the funny thing is that by the time this cross shows up on the chart, a lot of the damage has already been done. Bears would have already eaten into the price structure, making investors wonder what changed so quickly.
Why am I talking about all of this?
The charts are showing signs of exhaustion in a sector that has been the market’s favourite for months.
Yes, it’s the Defence sector.
The bullish story that once seemed like it couldn’t be stopped now seems to be losing steam. The overall story about defence stocks is still interesting, but the price movements of some important stocks are making investors raise their eyebrows.
Let’s look at three of these stocks where bears seem to be slowly getting a stronger hold.
1. Hindustan Aeronautics Ltd (HAL)
Long-term investors have liked Hindustan Aeronautics (HAL), and they have good reason to. Strong order books, support from the government, and a clear path to continued growth have kept people’s spirits high. But the charts show something else.
HAL: The double breakdown warning
In November, HAL fell below both the 50DEMA and 200DEMA on the daily chart. The stock did try to make up some of the ground it lost, but aggressive selling happened right near the 200DEMA. This rejection is important because it shows that bears are actively defending higher levels and don’t want the stock to gain momentum again.
More importantly, HAL broke below a Descending Triangle pattern, which usually means that sellers are getting stronger with each bounce.
The combined breakdown, which is below both averages and the pattern, shows that there is clear short-term pressure. This is a warning to investors to be careful.
There is no doubt that HAL is fundamentally strong, but the damage has affected the chart’s medium-term roots.
2. Mazagon dock shipbuilders Ltd
One of the best performers in the defence rally has been Mazagoan Dock. A lot of investors think it’s a long-term opportunity, and that might be true in the grand scheme of things. But the technical structure is starting to look tired right now.
Mazagon dock: Bulls losing the battle
The stock broke down from a Descending Triangle, which is a sign that there is already pressure on supply at higher levels.
The repeated rejection from both the 50EMA and 200EMA makes this bearish tone stronger. When a stock has trouble getting past these averages, it means that the bulls are losing strength and that people are selling into rallies.
For investors who are looking to make money in the short to medium term, this breakdown is a big deal. It looks like the bears are starting to take charge here, according to the charts.
3. Solar Industries Ltd
Investors have often thought of Solar Industries as the dark horse of the defence theme, which is quiet, steady, and capable. But in the last few weeks, it has clearly underperformed on the back of profit booking compared to the rest of the defence basket.
It’s interesting that Solar Industries was the first of the three stocks to break out of the Descending Triangle pattern. It also had selling pressure around the 50EMA and 200EMA.
When a stock goes down while the sector as a whole is still strong, it usually means that something is wrong with the company that investors should pay attention to.
The way the chart is set up right now makes it clear that bears are in charge. This is a time for positional investors who want to hold on to their investments for a short to medium amount of time to be patient instead of taking risks.
The sign of caution for investors
The defence sector still has a good long-term story to tell. But price action often speaks softly before fundamentals speak loudly. That whisper right now tells us to be careful. HAL, Mazagoan Dock, and Solar Industries are all showing early signs of trend deterioration through breakdowns, rejections at key averages, and pattern failures.
Sometimes, the best thing for investors to do is not chase a story but step back when the charts say so. The trend may start up again later, but for now, the bears seem to be winning.
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.
Brijesh Bhatia is an Independent Research Analyst and is engaged in offering research and recommendation services with SEBI RA Number – INH000022075. He has two decades of experience in India’s financial markets as a trader and technical analyst.
Disclosure: The writer and his dependents do not hold the stocks discussed here.
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