Now That GM Stock Has Gone Vertical …

by Serge Berger | January 4, 2013 8:26 am

American automaker General Motors (NYSE:GM[1]) on Thursday continued its massive rally from its July lows, and it looks like a trade might be setting up.

In case you are into news flow, both strong December vehicle sales as well as statements by the U.S. government that it would sell its remaining stake in the company by 2014[2] has helped GM shares rocket higher.

The strong rally since July has brought the stock price to the area between the 50% and 61.8% Fibonacci retracement of the entire move from the 2011 highs down to the July 2012 lows. (For reference, the stock remains well off its late 2010 IPO price of $33 despite recent strength.)

From a bigger-picture point of view, this is pertinent, as it is the first more significant resistance level coming into play since the July lows.

To put the recent rally in a little more context, let’s look at a closer-up chart. Since the July 25 low, General Motors stock has rallied just about 60%, or about 10 points in five months. We have all seen stocks display even more exuberance than this, sure, but what’s more noteworthy is the vertical leap since Dec. 21. While the broader market (S&P 500) is higher since then, GM rallied 10% in eight trading sessions, turning the slope of the stock from steep to vertical. Consolidation is near!

Although somewhat useless to point out in vertical charts such as GM (because overbought conditions can remain longer than most traders’ patience), I will mention the obvious overbought condition of the momentum oscillators.

While I am not one to jump into a trade unless I get a clear price signal (usually in the form of a strong candlestick signal), the vertical leap presently displayed on the chart of General Motors might already be good enough for more aggressive traders to initiate a partial short position. Still, a more conservative and higher-probability approach would be to wait for a one-day price consolidation (lower) to finish before leaning to the short side of the stock for a trade. I am merely looking for price consolidation, hence a 5%-7% downside move will be enough for me to get back out of this short-side try.

Option players (call sellers) also could take part in a potential price consolidation trade here, though I would be remiss not to point out that implied volatility in GM’s options is again at the low end of its range (see lower part of chart). The all-too-often hyped call-selling strategy usually is not as lucrative when considering the low premium being sold, not to mention the payoff diagram, which is the same as that of a short put.

Serge Berger is the head trader and investment strategist for The Steady Trader[3]. Sign up for his free weekly newsletter here[4].

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