by Serge Berger | April 11, 2014 6:57 am
Much has happened to the share price of General Motors (GM) since the government sold its last stake in GM stock last December. (All that followed the massive $49.5 billion bailout funded by U.S. taxpayers and subsequent public-market return in 2010.) In retrospect, the U.S. exited GM stock just in time … as one week afterward, General Motors shares topped out and have trended lower ever since.
In fact, GM stock currently sits roughly 20% off those highs.
Recent headlines around the massive GM recall have only made matters worse for the stock, which now looks to be on the precipice of a potentially deeper selloff.
To catch everyone up, General Motors is recalling 2.6 million vehicles (mostly in the U.S.) because of a defective ignition switch that is being blamed for 13 deaths to this point. Yesterday, GM announced that it will take a charge of $1.3 billion in the first quarter related to the recall costs. Meanwhile, federal prosecutors are looking into whether any workers or officers should face criminal charges for lack of properly disclosing vehicle defects related to the recall.
GM stock has faced several down days from all this; Thursday was merely the most recent decline, with shares falling close to 1%. Through the past four days, GM stock is down about 4%.
Looking back to General Motors’ IPO date in 2010 on the multiyear charts, the top in GM stock in late 2013 was (in hindsight) a classic breakout fake-out. The higher high from December 2013 vs. the January 2011 high simply wasn’t sustainable for the time being.
Investors who were long GM stock as far back as a few months ago should at least have taken notice when it broke below its summer 2012 uptrend line in late January, which as a simple risk management exercise was a good spot to trim some or all holdings.
What’s concerning on the stock’s daily chart below is the big so-called head-and-shoulders formation that developed since last September.
Note that the September highs (left blue bubble) served as a minor high, which led to the final blowout top in December. From there, GM stock developed an important lower high in early March (right blue bubble), all of which was built on a thinning support line around the $34 area.
With yesterday’s selling, this support line finally got snapped, and although General Motors stock could still chop back and forth a little, the trajectory for coming weeks could well be lower into the low $30s.
As an active investor, I need to be aware of the upcoming earnings announcement on April 24, but until that date, I might try the stock from the short side with a target in the low $30s. Any sharp snap-back to the upside thanks to unexpected “good” news relating to the vehicle recall would force me to close the trade.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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