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General Motors Company (GM) stock has been battered and bruised by the recent market swoon, dropping more than 30% in just four weeks. Fortunately for market players, the decline has reached a zone of strong support, completing a bullish trade set-up that could yield upside of 30%-plus in coming weeks. Just keep in mind that this is not a long-term bottom call because the stock has been trending lower since October 2017 and could easily post new lows for the rest of 2020.
Major declines rarely move in straight lines because short squeezes and dip buying generate sizeable counter-waves that yield impressive profits for well-timed long positions. Vertical downdrafts are especially vulnerable to high-percentage counter-waves because they set off oversold buying signals, attracting market timers and other technicians. These bounces can produce even stronger upside when they start at major support levels like GM’s closing print on Monday.
GM Long-Term Chart (2010 – 2020)
The stock came public in its current incarnation in November 2010 when the government bailout ran its course, opening in the mid-$30s and rallying to $39.48 in January 2011. That marked the highest high for the next three years, ahead of a downtrend that found support in the upper teens in October. Two successful support tests into the summer of 2012 established a triple bottom reversal, yielding a steady uptick that reached the prior high in December 2013.
The stock failed the subsequent breakout, descending in a volatile decline that ended at $24.62 during the August 2015 mini-flash crash. Keep that price in mind because GM shares hit that level for the second time in Monday’s session. Higher lows into the summer of 2016 improved bullish sentiment, generating a healthy uptick that reached new highs in October 2017. The rally stretched to an all-time high at $46.76 a few weeks later before a reversal triggered another failed breakout in the first quarter of 2018.
The subsequent decline ended at a two-year low near $30 in October, giving way to a 2019 recovery wave that stalled near $40 in March, well short of the prior high. The stock failed an August breakout attempt and turned sharply lower, losing ground into a late February breakdown through the 2018 low. Selling pressure has picked up steam since that time, reaching $24.15 on Monday. In turn, price has entered a zone of strong support, finally completing a 100% retracement of the 2015 into 2017 uptrend.
The monthly stochastic oscillator has now dropped into the most extreme oversold technical reading since September 2011, indicating that the downside may be unsustainable. The descent has also reached the .786 Fibonacci retracement level of the 2011 into 2017 uptrend, marking a high-odds reversal zone. Taken together with the 100% retracement outlined previously, the stars are now perfectly aligned for a high-percentage bounce.
GM Short-Term Chart (2017 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator has dropped to the lowest level since January 2019, when the stock was trading 13 points higher. This indicates that a rebound could be dramatic, lifting the stock back into the $30s in a relatively short time period. The first obstacle lies at the unfilled gap between $26.00 and $28.50, with a gap fill reaching a tough zone of resistance between $28.00 and the 2018 low at $31.46. Meanwhile, the 50-day exponential moving average (EMA) now descending from $33 could mark a final upside target for the bounce, with aggressive sellers returning at that level.
Note how both price zones correspond with narrowly aligned long-term Fibonacci levels, adding reliability to the prediction for a strong bounce. Even so, tight stop-loss orders are needed when taking exposure because price action routinely overshoots support and resistance during periods of high volatility. Better yet, lower position size to the absolute minimum you’re willing to accept because that will improve your odds for surviving the inevitable whipsaws.
The Bottom Line
General Motors stock could bounce 30% or more in coming weeks, reacting to long-term support levels and oversold technical readings.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.
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