General Electric (NYSE:GE) is an iconic American company that has fallen on hard times. Experts from both sides of the fence are passionate about their perspective so it makes for good fodder for investors. It has also become somewhat of a joke on Wall Street. Nevertheless, GE stock still has potential and it does have a future ahead of it provided current management sticks around long enough to finish the turnaround they started.
At best, the fundamentals are murky. There are plenty of analysts on Wall Street who claim to be experts on it but I doubt that anyone really knows for sure. Most of the traditional metrics are skewed but the price-to-sales ratio doesn’t lie. The company still has enough business to help it achieve its goals turnaround goals provided they maintain a healthy balance sheet and shed assets that are part of the future GE.
I’m not an expert at it but I know enough to not completely call it dead yet. Last time I wrote about trading it up, GE rallied 15%. This is a broken stock for sure, and a badly bruised company, but it is undergoing renovations at the present time. So investors can do one of two things. First, they can take a leap of faith and buy the GE stock to hold for the very long-term. The thesis here is simple: Give it time, and management will accomplish the repairs necessary to bring it back to better days. They will not bring back all its prior glory.
The second way is to actively trade GE stock for shorter-term profits. This one requires less emphasis on fundamentals and rely heavily on technicals. The GE chart carries enough clues to know where the important lines lie. These days machines do most of the trading so the technicals matter more than ever. A lot of fundamental traders discount them as mambo-jumbo, but their guidance is undeniable.
The price action unfolds according to repetitive patterns. So it would be foolish to ignore their forecasting skills. This is not to say that I can guess the direction of the next move, but I can confidently identify the important levels that will be the triggers or end points. And that fact will hone timing and minimize trading mistakes.
The August market-wide correction caused GE stock price to fall 30% from top to bottom. Luckily, the bulls were able to find footing and recover exactly half of it. This is not a coincidence — it occurs time and again in most charts. What makes this level important is that it has been pivotal all year. While the rally was good news, hitting a pivotal level means that GE stock is likely to face resistance here on the way up.
Moreover, this is also the 50% retracement level from last November’s correction. So clearly it will not be easy for the bulls to cut through it and that’s okay. Because normal price action suggests that most rallies will hit resistance levels and stall to consolidate within a tight range. This allows the bulls to build up a base so they can then finish the rally with a third leg higher.
In this case, GE would target $11 per share or higher. There will be resistance along the way at $10.25 and $10.75. For that to happen, onus is on the bulls to hold at or above $9 per share so they can achieve this plateau of consolidation that will serve as footing for the next leg higher.
This opportunity is purely technical therefore trading it will require setting tight stop losses and sticking to them. Otherwise we would risk turning a trade into an investment. Depending on investor risk appetite, the stop-loss levels are between $9.2 and $8.9 per share. Conversely, a close above $9.6 per share should invite more buyers to finish the recovery rally from the August correction in GE stock.
On the shorter time frames, GE stock is sporting what seems like a head and shoulder pattern with a neckline at $9.40. If it fails, GE risks losing another 20 cents from there before it hits the next support level. The good news is that so far the buyers have stepped in to support it. GE stock will need the help of the general markets because it cannot rally on its own.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.