FLIRting with Potential Profit

As sad as it may be, the defense sector continues to benefit greatly from the foreign-policy endeavors of the U.S. Although there is a lot of talk from this administration about winding down some of its overseas ventures in the not-to-distant future, I just don't see it in the charts. Don't you think that if the government were going to require less surveillance, fire fewer weapons and replace a diminishing number of bombed-out armored vehicles, the sector supplying all these products would begin to show signs of decreasing future profits? Well, it doesn't.

Market diversification is always a good quality to have in a company you're buying, in my view. And it is fairly easy to find a number of companies in this very government-focused sector that also sell their products to the private sector. Take FLIR Systems , for example.

FLIR designs, manufactures and markets thermal-imaging and stabilized camera systems worldwide. It sells its products to the government for broad use in areas such as counterterrorism, search and rescue, perimeter security, navigation safety, law enforcement, narcotics detection, maritime and border patrol and even anti-piracy applications. Outside the government sector, FLIR sells its products to a wide array of industrial and commercial industries. This implies that demand for FLIR products is fairly insulated from a slowdown in government defense spending if it should come about.

Fundamental considerations aside, though, the charts reflect continued reason for optimism. Long term, you can see that back in 2008, FLIR left volume at the top. Volume at the top is a magnet, and it eventually pulls prices back for a test, if not a breakout. I suspect that on this time frame, this will also be true of FLIR, as it is almost always the case with other trading instruments.

FLIR -- Monthly Source: Investools.com

FLIR also has shown real strength, with nice volume bars on thrusts higher in price. It is currently trading in a consolidation floor, as you can see in the chart, and given that the volume at the top of that floor is next to non-existent, if and when FLIR attacks, I would expect it to blow right through.

It is on the weekly chart, though, where the stock really tells us what it is up to. Note the nice high volume breakout bar back in September 2009. That volume was huge, and the price spread on the bar was enormous -- that is the anchor bar.

Now, let your eyes roam to the right a bit, and witness the two attempts to test and break under the anchor bar. Volume was nowhere near sufficient to break through on the first attempt, and the second attempt showed even less drive. That tells me it probably isn't going to break lower.

FLIR -- Weekly Source: Investools.com

On this time frame, the chart tells us that the high $25 region is a drop-dead area. My stop will be underneath that level, therefore. When I talk about stops, I am almost always talking about closing prices. In other words, if my stop were at $25.50 and FLIR were to trade to $25.49 and close there, I would stop out. I need a close, not just a print, to make me exit. Now, there are times when it is highly likely that the stop will trigger by the end of the day. In those cases, there isn't a reason to wait.

On the weekly chart, the initial target is the April high. There is volume at that high. Unless FLIR can get through that area and close above it with increasing volume, the consolidation floor is likely to continue. That is the bar to watch on the topside, just as the anchor bar is where you should focus on the downside.

Here's the daily chart showing the short-term time frame.

FLIR -- Daily Source: Investools.com

With earnings already on the table, the earnings risk has been removed. The ideal purchase area is the $28.50-29.20 area. There is gap support there, as well as anchor support on this time frame. It appears it could drift back into that area before attempting to test the top once more. The long-term target is the highs on the long-term time frame. That's what makes it a reasonably compelling idea.

Thanks for reading. Until next time, just keep trading the charts.