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Trade of the Day: General Motors Company Stock Gets Oversold

Shares of companies sensitive to higher steel and aluminum prices dropped on Thursday on the back of President Donald Trump’s announcement that he would impose tariffs on said commodities. Among the stocks that fell because of this were car manufacturers such as General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F). While it may be a tad early still, GM stock in particular is now arriving at a key technical confluence area where a trade to the upside could be setting up.

General Motors Stock Is a Buy on a Pullback

Source: Shutterstock

On Thursday President Trump offered that he would start tariffs on steel and aluminum imports. The president  proposed a 25% tariff on steel and 10% on aluminum imports. Investors voted with fear on Thursday as a result and stocks dropped.

While such tariffs could have positive impacts on U.S. steel and aluminum companies, the action may also spark a trade war with other nations … at least those were concerns uttered by many smart money investors I spoke with on Thursday.

GM Stock Charts

Click to Enlarge

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

Looking at the big-picture multi-year weekly chart of GM stock we see that after it topped out in October of last year a series of lower highs formed, which ultimately led to an accelerated down move in February and again yesterday.

Thursday’s additional 4% drop in the stock now brings the total sell-off to just about 20% since last October. At the same time, the stock is now also arriving at a confluence support area in the $36-$38 area made up of both diagonal as well as horizontal support as marked by the black lines. While this does not yet automatically make GM stock a buy, it does offer some well-defined lines in the sand against which one can measure risk.

Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the daily chart we see those support lines more closely. Here we also note that from a momentum perspective as represented by the MACD momentum oscillator at the bottom of the chart GM stock is finally reaching severely oversold conditions.

From here, less risk-averse traders could look to take an initial stab on the long side of GM stock using the $36 area as a stop loss and an initial upside profit target around $41. One could also express a quasi bullish view by selling out of the money put spreads.

Alternatively, more risk-averse traders would first want to wait for signs of stabilization and a bullish reversal day before legging into this trade.

Check out Anthony Mirhaydari’s Daily Market Outlook for March 2.

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