Shares of automakers dropped on Tuesday on the back of a report that showed car sales declined in the month of July. Shares of General Motors Company (NYSE:GM) slipped nearly 4.4% on the day, which through the lens of technical analysis further confirmed an already concerning sign on the charts.
The path of least resistance, all else being equal for GM stock in the near-term, looks to be to the downside, and active investors and traders have well-defined parameters to play the stock lower at this juncture.
When General Motors reported its latest quarterly results on July 21 the company handsomely beat both top- and bottom-line expectations; revenue rose nearly 12% in its latest quarter.
The company also raised its 2016 profit outlook, all of which led GM stock to rally about 3.5% that day.
From a price action perspective in the near-term, however, this initial post-earnings pop was as good as it got and, as we will see on the daily chart below, a notable bearish reversal has taken place since.
GM Stock Charts
Before looking at the near-term chart however let’s first note the current state of the multiyear chart.
Here we see that GM stock, since topping out in December 2013, has been trading in a well-defined down-trending channel where rallies got sold and dips are getting bought. Through this lens, GM stock has been a good stock to ‘play the range,’ which is also the trade I see setting up again here.
Another way to look at this chart is to note that since the late 2013 highs GM stock has been making a series of lower highs and lower lows, which is to say that upon the confirmation of the next lower high, which may have just happened last week, a next price target could be a lower low, i.e. a move to the lower parallel support line.
Zooming in on the daily chart, we see that the initial post-earnings exuberance rally on July 21 threw GM stock above its red 200-day moving average upon an up-gap. Five trading days later however GM stock gapped lower and back below this 200-day moving average.
This so called ‘island reversal’ was further confirmed on Tuesday as GM stock dropped nearly 4.4% on the back of weak July sales figures.
From here, traders and active investors could consider attempting to sell short the stock or buy puts or put spreads if they think the stock could fall further and back toward the $27 area as a next downside price target.
At the latest, a full reversal of Tuesday’s selling spree on a daily closing basis, i.e. back above $31.10, could serve as a stop-loss signal on this short-side trading setup.
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