Technical Analysis
I found this trade using the pattern finder on TOS and initiated my analysis on a technical level. So, logically, this comes first.
Here is a legend of all the drawings on the chart and I apologize for the messy drawings. Please read on to see what the drawings mean.
WEEKLY LEGEND:
Red Lines: E-Waves
Blue Fibs: Fibonacci extensions of the 0-1 Wave.
Green and Black Lines: Important Fib levels from the daily chart (explained later)
Grey box: The Daily chart's time frame
DAILY LEGEND:
Red Lines: E-Waves
Green Fibs: Extension of the 2-3 Wave
Blue Fibs: Extension of the 0-1 Wave
Purple Fibs: Extension of the 0-3 Wave
Now that we know what the Fib lines are, I can begin my explanation. On the weekly, we completed waves 1 and 2 and are in the middle of wave 3. This means that theoretically we have some significant upside potential and can also expect a corrective wave 4 before the stock continues upwards. Also of note is the fact that the Stoch indicator is showing some major overbought pressure. However, the fast line is still above the slow and a momentum reversal has not occurred, indicating that wave 3 is not yet over.
The question then is when will wave 3 be over? Looking at simply the fibs on the weekly (blue lines) we have 3 important levels to look at. The 100% extension coincides very closely with the channel line and is probably going to be an important level to watch. The yellow box is also extremely important and the reason for that can be found in the daily charts.
On the daily, firstly, there is a bullish momentum reversal (albeit very close to the overbought level) that could mean a healthy upward movement.
Additionally, the daily chart has formed an E-wave as well and is in the middle of the 5th wave. I believe that the end of this 5th wave on the daily will coincide with the end of wave 3 on the weekly. I have drawn some important and common fibonacci extensions (explained in the legend). The areas where these fibs are clustered together are going to be important resistance levels. Thus, the grey boxes on the daily chart are going to be important resistance levels. The green and black line and the yellow box on the weekly is drawn based on these fibonaccis. That is what makes the $63-66 level very important.
To top it off, this same level is very close to the top of an inverse head and shoulder on the weekly.
So as you can see, all the technicals have lined up and indicate that the stock should move higher and after struggling in the 63-66 level. Wave 5 is still too unpredictable on the weekly and I would be hesitant to make any guesses about that wave.
Financial
Financial analysis could play a key role in this stock because earnings are due on Oct 28th. Admittedly my financial analysis on this is quite shotty. I merely glanced at the ratios and determined they looked good. However, I did research the news for some time and found good news all around.
The company is expanding operations overseas; just won a $31 million contract from US gov't; positive M&A activity is going to allow the company to expand outside of the defense industry; and so on. So based on all this I at least expect GD to give earnings estimates that outperform analyst expectations.
The Trade
I realize I have already written a book, so I am going to keep this section short.
Bought a Back Ratio Call
+5 60 Nov Call
-3 55 Nov Call
In short, I am going to hold on to this until the 66 level (where I can probably make around $200) then sell off parts of the trade. I am hesitant to put a stop on this because if the stock falls to $55, I will be $250 in the money. Theta is really my only enemy. Volatility is high and I hope it remains high. Seeing has how the stock has nearly doubled since March, I expect it to continue going up rapidly or crash rapidly.
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