GM Stock Holding 3-Year Breakout Into Earnings
General Motors Company (GM) stock is holding up surprisingly well despite an industry-wide sales slump that has encouraged Wall Street analysts to declare a cyclical top in automobile sales. GM is also acting better than rival Ford Motor Company (F), which continues to struggle near multi-year lows. Even so, it will take solid metrics to generate buying interest following GM’s July 25 earnings report.
GM stock has underperformed the broad market since topping out in the low $40s in 2013, failing to join the S&P 500 at new highs. Intense competition, a healthy used car market and quality issues that include malfunctioning ignition switches have undermined customer loyalty and bottom-line results. Even so, a December 2016 breakout above a three-year trendline remains in force despite aggressive testing, signaling resilience that could translate into higher prices. (See also: Will General Motors Stock Disappoint in Q2 Earnings?)
GM Long-Term Chart (2010 – 2017)
The reorganized company came public in November 2010 after the government dumped the last tranche of its bankruptcy bailout shares. The IPO attracted strong buying interest that faded in January 2012, yielding a top at $39.43, ahead of a steep decline that dropped the stock price into the upper teens. It tested that level twice into the second half of 2013 and ascended in a recovery wave that took nearly two years to complete a round trip into the prior high. (For more, see: 4 Auto Stocks On Track to Beat in Q2.)
A December 2013 breakout faded after the stock lifted above $41, triggering a reversal that trapped momentum buyers in a nasty decline that relinquished nearly 10 points into the April 2014 low at $31.70. That marked the first in a series of lower lows that continued into the August 2015 low at $24.62. Together with lower highs during the same period, price action carved a broad descending wedge that ended with a December 2016 breakout and deep pullback into May 2017.
The monthly stochastics oscillator entered a sell cycle in February 2017 and crossed over at the oversold level in June. The signal line still has not accelerated higher, a requirement to confirm a buy cycle that could last six to nine months at a minimum. A positive response to this week’s earnings could do the trick, with a rally above $38.50 setting the stage for an assault on the multi-year high in the low $40s. (To learn more, check out: Stochastics: An Accurate Buy and Sell Indicator.)
GM Short-Term Chart (2014 – 2017)
The sequence of lower highs off the 2013 peak carved a well-developed trendline into 2016, while lower lows expended in a series of shakeouts that ended after the August 2015 mini flash crash. Volatility contracted into the second half of 2016, eased by a series of higher lows that re-established support above $30. An 18-month symmetrical triangle embedded within the expanding wedge generated ideal conditions for the year-end breakout, but the initial rally impulse stalled quickly near $38.50. (See also: Billionaire David Einhorn’s GM Plan Crashes and Burns.)
That price level has emerged as a major inflection point since the July 2014 failed bounce, with the sell-off into March 2017 signaling the fourth major reversal. That tells informed market players to watch the level closely following this week’s earnings report because a breakout will shift the long-term technical tone, significantly raising the odds for a rally that reaches new highs in the mid-$40s.
On-balance volume (OBV) peaked at the end of 2013 and entered an aggressive distribution period that continued into the first half of 2015. It then eased into a sideways pattern that signaled a delicate balance between buyers and sellers (green line), with the standoff continuing into June 2017 when buying pressure lifted the indicator to a three-year high. This matches equally bullish price action that could finally eject the stock into a sizable uptrend. (For more, see: On-Balance Volume: The Way to Smart Money.)
The Bottom Line
General Motors stock has been attracting significant buying interest since breaking out above a three-year descending trendline in the fourth quarter of 2016. This change in character could be significant, setting the stage for an advance to new highs in coming months. (For related reading, check out: Automakers Will Get a Jolt From Electric Car Sales.)
<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>