There's a Huge Earnings Season Trade Shaping Up Right Now

Editor's Note: Chris Johnson has worked in finance for more than 20 years, holding the titles Director of Research and Director of Quantitative Analysis (quants are like the rocket scientists of investing) at a well-known equity and options research firm. You're going to be hearing a lot more from him soon, but he wanted us to get in touch right away with this lucrative trade on Lockheed Martin Corp.'s just-released "earnings surprise." Even better, this is a great trade on a great stock to own long term. Here's Chris...

Traders and investors are moving into the market to "buy the news" as Lockheed Martin comes off of a particularly strong earnings report. Shares are set to make a strong technical move above their 200-day moving average, this after spending the last two weeks trading just below the key trendline.

It was relatively clear that the market was "selling the rumor" ahead of the report, to their eventual chagrin, creating a post-earnings trading opportunity.

The jury had been out on where the earnings and outlook would take the stock... but then the jury came back with a loud and clear "Buy!" verdict.

Here's the play...

Technicals and Fundamentals Are Bullish for Lockheed

This morning, ahead of the open, Lockheed Martin announced earnings results that were better than expected for the latest quarter. Lockheed's numbers bested analyst expectations by 25%, their best in more than five years. The report also showed a 14% year-over-year revenue growth, the strongest in two quarters.

Today's response to the positive report results in a move above the 200-day that will conclude the stock's oversold status as buyers grab shares while they remain a relative deal.

The last time that Lockheed Martin shares spent a similar amount of time below their 200-day moving average was July 2015. A better than expected earnings announcement shot the shares 8% higher after they had already emerged from this support. Today's break higher may be more significant, but there's a technical catch.

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More significant is the recent pullback to the 50-week moving average, the first since February of this year. This has been staunch support for the shares since the long-term bullish rally was put in place in 2013. The positive earnings repost, along with the positive fundamental story of either presidential candidate being bullish for defense stocks, makes Lockheed Martin a bullish technical and fundamental target.

Our model's score for Lockheed Martin shares is a buy based on the lack of interest from the Street for the shares. Currently, the stock is only recommended as a "Buy" from 38% of the analysts tracking the stock, much lower than the average for the S&P 500.

The fundamental story remains positive for the defense sector, regardless of who wins the election in a few weeks, supporting a bullish outlook along with the strengthening technicals.

Profit Play: Buy-to-open the LMT November 18n 2016 $245 calls (LMT161118C00245000) with a limit price of $2.20 or better.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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