Leading defense contractor Lockheed Martin (NYSE:LMT) has been a great long-term investment for well over a decade now. The stock is up 687% from its March 2009 bottom versus a 520% gain for the S&P 500 over the same time period. The Russian aggression in Ukraine shook the collective West to its core and showed that there is no place for complacency in the 21st century.
As a result, many countries announced plans to increase their defense budgets. Without a doubt, this means more business for the likes of Lockheed Martin, General Dynamics (NYSE:GD) and Northrop Grumman (NYSE:NOC). The stock market is forward-looking and pushed defense stocks to new records shortly after the Russian invasion in Ukraine.
Fortunately, Russia’s military turned out to be a lot weaker than feared. The bulls soon found out they couldn’t keep the momentum going. As of this writing, defense stocks are trading around the same levels they did prior to February 24th, 2022. Lockheed, in particular, is down 11% from its April, 2023, record of $508 a share. Is this a dip to buy or the beginning of a deeper correction?
Lockheed‘s weekly chart reveals that the post-2000 uptrend has resulted in a complete five-wave impulse. The pattern is marked (1)-(2)-(3)-(4)-(5), where the five sub-waves of all three motive waves – (1), (3) and (5) – are also visible. In the case of the corrective (2) and (4), the market has taken the guideline of alternation into account.
Wave (2) was a sharp plunge during the 2008 Financial Crisis, while wave (4) is a sideways a-b-c-d-e triangle. Wave (5) looks like a textbook ending diagonal. Triangles precede the final wave of the larger sequence and the ending diagonal is a reversal pattern in and of itself. Overall, the Elliott Wave theory states that a three-wave correction follows every impulse.
So if this count is correct, we can expect a notable drop in Lockheed Martin’s stock price going forward. It can potentially erase all of wave (5)’s progress and then some. The support area near wave 4 of (3) looks like a logical downside target. This puts levels near $300 a share within reach. From yesterday’s close at $452, that would be a ~33% decline.
