GM Falls And Can't Get Up

01/03/07 01:46:16 PM

by Arthur Hill

General Motors was one of the top-performing Dow components in 2006, but 2007 is not likely to be so good for GM as a bearish continuation pattern unfolds.

Security: GM
Position: Sell

Even though General Motors (GM) ended the year with a sharp decline in late November, the stock was still up around 50% in 2006 — not bad for a stodgy old automaker. The November decline was quite sharp, though, and did some lasting technical damage. First, the move broke the trendline, extending up from April low. Second, the decline broke below the late September and early October lows. Third, the stock broke below its 25-week moving average for the first time since April 2006 (Figure 1), marking the start of a downtrend.

FIGURE 1: GENERAL MOTORS, WEEKLY. Despite GM's decline in late November, the stock was still up around 50% as the year ended.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Turning to the daily chart (Figure 2), we can see that the stock never really recovered after the sharp decline. GM fell from 35.5 to 28.5 in two weeks and then traded flat for five weeks. Overall, the pattern looks like a sharp decline and rising flag. These are bearish continuation patterns, and a move below the lower flag trendline would signal a continuation of the November decline.

FIGURE 2: GENERAL MOTORS, DAILY. The stock appears be trading flat since the sharp decline in November.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

As far as indicators are concerned, downside volume has been strong and momentum is nearing resistance. The November decline occurred on big volume. There was a surge during the last few days of December, but this occurred on low holiday volume. The surge failed on January 3, 2007, as the stock declined on expanding volume. The 5-35 price oscillator rose in December but has yet to turn positive. The advance simply signals flat momentum from the flag. Look for a move below the signal line to confirm a flag break and signal a continuation lower.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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GM Falls And Can't Get Up

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