Northrop Grumman (NOC) suffered an astonishing 30% drop in less than two months. While a haircut of this size is sure to attract the attention of traders, a large drop does not automatically guarantee an immediate rebound. Trying to catch a falling knife will quickly empty your account. Finding the actual bottom requires patience and strict reliance on objective technical indicators to identify the correct entry point. The tools I use to stalk this NOC setup are the exact same metrics that power Maya, a fully automated rules-based trading platform. To time this particular entry, I am looking at how two different indicators interact. 1. Accelerating MACD (5, 13, 5): Early Radar – I prefer this tighter MACD setting because it acts as an early warning system that highlights changes in momentum before the rest of the market wakes up. On April 29th, the indicator triggered a clear bullish crossover, indicating that the aggressive selling pressure was finally starting to stall. But it would be a mistake to take any one indicator as gospel. If you enter a trade purely based on the early MACD signal, you could end up in a losing position for weeks while the stock price continues to fall. This is a watchlist trigger, not a buy signal. 2. Relative Strength Index (RSI): Execution Trigger – This is where the actual trade setup is completed. NOC’s RSI fell below the 30 level on April 20th, officially pulling the stock into oversold territory. This is exactly the environment in which the mean-reversion setting emerges, but the golden rule remains the same. You don’t simply buy a stock just because it’s oversold. We will have to wait until the RSI rises above 30 again to prove that buyers have indeed stepped in to protect the price. The definitive proof finally arrived on May 18th. By combining these two indicators, the true value of the system becomes clear. Thanks to RSI, we were able to stay safely on the sidelines for nearly three weeks after the first MACD crossover, preventing a premature entry and allowing a true bottom to form before risking capital. Trade Setup: NOC 555-560 Bull Call Spread Since NOC is currently hovering around $555.58, my strategy is to deploy an at-the-money (ATM) bull call spread. To construct this, we simply bracket the current price trend. This means buying an in-the-money (ITM) call just below the current trading level and simultaneously selling an out-of-the-money (OTM) call just above it (for example, using the 555/560 strike). As is often the case with these heavily packaged ATM setups, you can typically expect a fill at a limit price of around $2.50. This specific price range makes position sizing and risk management incredibly easy. If you decide to scale up to a 4-contract position, you will be betting exactly $1,000 for an opportunity to earn a corresponding profit of $1,000. If NOC can reasonably break through its cap strike (the $560 mark) before expiration, this setup can literally double your risk capital within 30 days. Given how oversold this defense giant has become, asking for just $5 to $10 more is a very achievable goal, coupled with the overall market’s upside. My exact trade setup is: Buy $555 call, expiry June 18th Sell $560 call, expiry June 18th Number of contracts: 1 Cost: $250 Potential profit: $250 — Nishant Pant Founder: https://tradewithmaya.com/ Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader Disclosures: None CNBC Pro All opinions expressed by contributors are: These are solely their opinions and do not reflect the opinions of CNBC, its parent or affiliate companies, and may have been previously disseminated on television, radio, the Internet, or another medium. The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
