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CHANNEL LINES


General Electric Bearish Divergence

10/03/12 08:37:40 AM
by Donald W. Pendergast, Jr.

Having risen more than 320% since March 2009, shares of General Electric may be preparing to correct before moving higher.

Security:   GE
Position:   N/A

General Electric's (GE) common stock was bludgeoned during the 2007-09 market meltdowns. Finally cratering at 6.85 per share, traders, technicians, and investors were in disbelief that the share price of one of the world's most advanced and diversified manufacturing/technology companies had been laid to waste during the financial panic.

GE didn't stay at 6.85 for long, however, and soon began the arduous process of climbing out of its sub-$7 hole in the ground. Today, the stock is edging close to 23.00 (for the first time in four years), and while it still has some positive technicals that suggest it could run higher into late 2012-early 2013, in the near term, GE is setting up for a correction over the next seven to 10 days. Here's a closer look now.

FIGURE 1: GE, DAILY. GE may ultimately hit its upper channel line by late October-early November 2012, but if its long-term money flow histogram continues to make lower highs, the stock becomes vulnerable to a significant correction.
Graphic provided by: MetaStock.
 
The standard error channel plotted on GE's daily chart (Figure 1) is rooted in the March 3, 2009, low of 6.85. It's amazing at how well GE has respected the outer boundary lines as well as the midpoint line; I've highlighted in blue the general areas where the channel lines have acted as meaningful support or resistance. Traders and investors who already use Keltner channels or Bollinger Bands probably already know just how powerful these kind of standard deviation-style support/resistance levels can be, and the standard error channel is just as useful, particularly when applied to long-term data series.

Currently, GE is more than halfway between its midpoint and upper channel line, still rising steadily from its early September 2012 low -- which happened to occur right near the midpoint of the channel. But if we stand back and look at GE's long-term money flow, we find that its 100-day Chaikin money flow histogram (CMF)(100) is rapidly losing momentum; the current histogram level is actually lower than it was at the stock's previous swing high back in late March 2012.

Essentially, this means that the stock is being driven higher on declining amounts of trading volume, indicating that the smart money is steadily selling into the current rally, with lesser-informed traders/investors more than willing to buy the stock from them.

FIGURE 2: NEW HIGHS. The .OEX components making new highs as of September 28, 2012.
Graphic provided by: MetaStock.
Graphic provided by: Deel New Highs Screen from MetaStock 11.
 
Meanwhile, GE's cycle studies suggest that this mega-cap issue is very close to turning lower in the near term, before possibly making another (and final) surge higher into year-end 2012. October 10, 2012, is the anticipated date for the cycle low; the 20.50 to 21.00 area is expected to provide significant support on a near-term decline.

Once this anticipated cycle low is complete, GE is then projected to run higher, possibly peaking again between the dates of October 28 and November 5, 2012; the price range for that high is likely to be between 22.66 and 24.36. If the long-term money flow continues to make lower highs by that time window, then GE becomes extremely vulnerable to a significant correction, especially since the upper range of the anticipated cycle high (24.36) coincides with the upper channel line's location. See Figure 2.

Playing GE in the near term on a daily close below 22.07, consider buying the November '12 GE $23.00 puts. These puts offer a bid-ask spread of only 0.01 and also have plenty of open interest and volume; if filled on the trade, simply set a profit target of 21.00 and let the trade run. If the puts decline in value by 50% before the profit target is hit, just close the trade for a small loss and wait for a better setup to come along. If that doesn't happen, just hold them until the target is hit -- which is highly probable on a break below 22.07 in the stock.

Be sure to keep your account risk conservative so that you don't inflict unnecessary damage to your pool of risk capital on this trade, no matter how bearish you may be on GE at the moment.



Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the Trendzetterz.com S&P 500 Weekly Forecast service.

Title: Market consultant and writer
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