European defense stocks are witnessing increased movement as the region anticipates higher expenditure in the sector amid escalating geopolitical tensions.
One such stock is German automotive and arms manufacturer Rheinmetall AG (ETR: RHM), which has been on a winning streak in recent sessions.
As of press time, RHM was trading at €892.4 ($935.16), up 9% since the close of the last trading session. On the weekly timeframe, RHM’s share price has rallied 21% and 47% year-to-date.
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Previously, Rheinmetall AG was identified as a top military stock to buy in October 2023, trading at €233. Since then, its price has increased to €892, representing a gain of over 280%.
Why Rheinmetall stock is rallying
Rheinmetall is emerging as a favorite among investors seeking to capitalize on the renewed focus on defense capabilities across the continent. This comes as Europe navigates complex international relations, particularly following a recent diplomatic rift with the United States on the course of the Russian-Ukraine war.
This situation has prompted EU countries to consider strengthening their defense mechanisms reducing reliance on U.S. partnerships for security.
At the same time, Rheinmetall AG could benefit from a major European defense initiative aimed at increasing spending and aiding Ukraine. To avoid political friction, the initiative is set to be unveiled after the German elections on February 23. The defence giant is already witnessing rising military orders, mainly from Germany.
Meanwhile, Donald Trump’s push to end the war between Russia and Ukraine has heightened European concerns over potential U.S. disengagement. Anxiety grew after his recent call with Vladimir Putin, which sidelined Europe in U.S.-Russia talks on Ukraine.
Rheinmetall could receive a further boost as the firm looks to expand its operation after CEO Armin Papperger met with Ukrainian President Volodymyr Zelensky. The meeting aimed to explore joint industrial projects, including local ammunition production.
What next for Rheinmetall stock price
Considering geopolitical situations could shift at any moment, the key question remains whether Rheinmetall’s current rally will be sustainable. However, as technical analyst Lars Hattwig highlighted, the stock’s technical setup signals a concerning outlook.
In an X post on February 17, Hattwig noted that although Rheinmetall opened strong, the stock showed a price gap. He warned that this rapid rally may be nearing exhaustion, raising the possibility of a pullback.
The gap-up formation appears to be an exhaustion gap, a pattern that often emerges in the final stage of an extended uptrend.
Such gaps typically indicate a surge in buying pressure before profit-taking leads to a correction or consolidation. The Relative Strength Index (RSI) has also entered overbought territory, suggesting upward momentum could soon slow.
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