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Early Hints at General Motors' Weakness

05/10/02 02:01:20 PM
by Gary Grosschadl

Multiple negative divergences are often an early sign of trouble ahead. Some are starting to appear for GM and traders should watch for additional confirming weakness via price action and pattern violation.
The indicators and volume show that despite the positive price action where prices challenge recent highs, there is no bullish confirmation from them. Negative divergence occurs when these indicators have flat or opposite sloping trendlines.

Security:   GM
Position:   N/A

During this strong rise for GM, the 20-day exponential moving average (EMA) has been strong support. A small dip to test this support would not be a problem, however a move below the minor trendline at $63 where gap support may hold would start ringing some short term alarm bells. Failure here would likely lead to a test of that congestion zone in the $60 area and would violate the 50-day EMA line that many institutional traders watch.

Also should the $63 trendline not hold, there would be a case for a double or triple top-type failure, especially if a weakening of bullish volume occurs.

Graphic provided by:
Short term traders can often spot possible trouble brewing by watching for multiple negative divergences (see previous article, "The Power of Multiple Negative Divergence," April 15, 2002).

Yes, you can run the risk of bailing too early. However the discomfort of having to reload again is much easier to take than getting caught in a vicious downdraft.

This chart is also a good example of previous gaps becoming crucial areas of support. Short term traders may target these areas for exit/entry points for long/short positioning.

Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

E-mail address:

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