AeroVironment, Inc. (AVAV) shares broke out more than 5% on Tuesday after testing key support levels. While there was no specific news, traders are bullish on the stock given the expected increase in defense spending on drone technologies. The Army Research Lab indicated in late July that it would fund new programs related to highly autonomous drones and robots, with a focus on technologies that could evade electronic warfare.
In late June, AeroVironment reported fourth quarter revenue that soared 47.9% to $125.38 million and earnings per share of $1.30 – both beating consensus estimates. Shares responded by soaring to around $40.00, after which they slowly fell. With first quarter earnings coming up, the stock could see a similar boost if management exceeds consensus forecasts, although the company’s financial results are notoriously bumpy. (See also: What Will Trump’s Defense Boost Do for Stocks?)
From a technical standpoint, the stock rebounded from trendline support levels at around $37.00 to break out from trendline resistance and retest prior highs at around $40.00. The relative strength index (RSI) appears a bit lofty at 65.14, but the moving average convergence divergence (MACD) could see a bullish crossover in the near term following its prolonged downtrend. Traders should maintain a bullish bias on the stock over the long run.
Traders should watch for a breakout from the next key resistance level at $40.00, which could lead the stock significantly higher. On the other hand, a failure to rally above the key resistance level could lead the stock to retest support at around $37.00. A breakdown from these levels and the 50-day moving average at $36.62 could lead the stock back down to trendline support at around $32.00 – although this appears unlikely barring a negative Q1 earnings report. (For more, see: Should You Invest in Weapon Stocks?)
Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.