The defence equipments and engineering sector has been quite vibrant over the past couple of weeks and it is seen relatively outperforming the broader markets. This year it has already given a return of nearly 50% on average, while still leaving some more potential for an upside. After the banking, financials, media, textiles, and autos, it is now the defence equipments and engineering Industry stocks that are in the trend lately. This year some of the stocks like Mazagon Dock Shipbuilders Ltd, Cochin Shipyard and a large cap stock like Bharat Forge has moved up nearly 90%, 50%, and 34% from their lows respectively in this year.  

Paras Defence and Space Technologies Ltd (PARAS) is once such stock that holds potential for a significant upside. It has already moved up ~55% this year from its lows and has the potential to move higher by another 10% to 12% from the current levels.

Since Nov’21, the stock price of Paras Defence was in a corrective downtrend forming lower tops-lower bottoms until June this year. Finally, after forming a bottom at 523 levels, the stock price gradually changed its trend. It witnessed a gradual up-move and crossed above the 50-day moving average as well the 100-day moving average while it found resistance at the 200- day MA Technically speaking, when the stock price moves above the important moving averages it usually indicates that the underlying trend of the stock has turned bullish.  Following the up-move, the stock price faced difficulty in surpassing 680 levels which coincided with the downward sloping trendline resistance. This level acted as a strong resistance for the stock, and it retraced near the 50-day and 100-day moving averages which acted as a support level for the stock

After holding well above the 50-, and 100-day moving averages, the stock price resumed its move  move higher. By the end of August, the stock price not only broke out from the price pattern at 657 levels but also crossed above the 200-day moving average. Such a price action was accompanied by an exponential increase in volume which confirmed the potential upside in the stock.

Following the breakout, the stock price consolidated near 695-710 levels. While the stock shows a corrective retracement, the 50-day moving average has also crossed above 200-day moving average resulting in a Golden Crossover.

Presently, the stock price has retraced nearly 38.2% as per the Fibonacci retracement levels which invite buying opportunities at current levels. The likely up move in the price may see the stock testing 815 levels and this would mean a potential upside of ~10% for the stock. Any price moves below 685 should be considered to move out of the stock.

Foram Chheda, CMT

The journey of this stock has been amazing; from the low point of 19 formed in March 2020 when the markets overall made their low point following the onset of the pandemic, the following months saw this stock posting fantastic returns over the coming months.  From the lows formed near the levels of 19 in March 2020, the stock rallied and marked its high point at  236 in July 2021.

This is Firstsource Solutions Limited (FSL).

The following 12 months that followed weren’t so kind for FSL. The stock, while staying in a continued corrective decline lost over 50% of its value and went on to test the low point of 93 in June 2022.

Over the past two months, the stock has been trying hard to mark a bottom for itself and put a potential base in place. The stock has formed a defined trading range and the most recent price action shows a strong attempt to break out of this formation and confirm a reversal.

The stock attempted a breakout on higher-than-average volumes. The relative strength continues to improve; this is evident from the RS line trying to reverse its trajectory. It has also crossed above the 50-period MA.

The MACD has shown a bullish crossover; it is above the signal line and in continuing buy mode. A fresh PSAR buy signal is also seen on the charts.

Importantly, the RSI has also shown a breakout from a pattern; this has occurred ahead of the actual price breakout. This is a bullish sign as RSI is a lead indicator and price tends to follow the RSI.

While making an attempt to break out and stage a reversal, the stock has also crossed above its 50-, and 100-DMA. If the breakout continues and if the price moves in the intended direction, it may go on and may test the levels of 200-DMA; the 200-DMA is currently placed at 129.33. 

Although the current price action triggers a fresh entry point in the stock, any close below 101 would act as a stop-loss for this trade.

Foram Chheda, CMT