One stock that has not participated in the recent strength of the bull market is General Electric (NYSE: GE). GE topped out at $33.00 in July of last year, and proceeded to trend down to a 52-week low of $23.58 hit a month ago. That drop saw the stock lose nearly 30% of its value. Since then, it has remained in a trading range. There are now technical signs that GE may be close to reversing this downtrend and moving into an uptrend.
What makes this situation more interesting than normal is that GE could end up rallying, even as the wider market stalls and pulls back or moves into consolidation. GE’s relative weakness when compared to positive performance of benchmark indices such as the S&P 500 implies that the stock price is likely not influenced by the market. It is the worst performer of the 30 stocks in the Dow Jones Industrial Average, on both a year-to-date and 1-year basis. The company is scheduled to report Q3 earnings on October 20th.
GE topped out in 2016 and it’s been downhill since
The weekly chart below shows the price action over the past four and a half years, with a large head and shoulders top pattern marked around the 2016 highs. This pattern is a classic bull trend reversal pattern which reflects the relatively slow process of a market, moving from the bulls being in control to the bears taking over. The initial bearish trigger is signaled when the stock price breaks down through the trend line, referred to as the neckline, which is drawn along the bottom of the pattern. It denotes an area of price support. The breakout occurred on a move below $28.85 in May of this year.
Signs that the decline is close to completion
There are several reasons to believe GE may have hit its bottom and is getting ready to break out higher and rally with some enthusiasm. It has fallen to a long-term support zone and could soon show clear signs of strength.
We can derive a potential target from the breakdown of the head and shoulders top by measuring the pattern’s height in price and then subtracting that value from the breakout price. In this case, the target is $23.64, almost an exact hit with the recent $23.58 bottom. That bottom was in an area of prior price support or resistance, as seen by the horizontal dotted blue line and red and green arrows marking points. In addition, the 14-week Relative Strength Index (RSI), which measures fluctuations in price momentum or rate of change, has moved from trending down to up, a positive sign referred to as a bullish divergence.
Bottom reversal pattern present
One of the more important elements for what happens next is the small potential head and shoulders bottom pattern, that has formed in the daily chart below. Like the head and shoulders top, this pattern is a classic trend reversal pattern, but in this case it reverses a downtrend rather than an uptrend.
Watch for an upside breakout
As with all reversal patterns, a breakout trigger is needed before the pattern can be deemed valid. GE’s bullish breakout would occur on a decisive rally above $25.30 and is confirmed on a subsequent daily close above that price. Such a move would also trigger a breakout above the 50-day exponential moving average (EMA). The 50-day EMA acts similar to a trend line and marks resistance of the near-term downtrend at an angle. Also, note the bullish RSI divergence on the daily chart. It is more pronounced on the daily versus the weekly chart and is another indicator supporting the likelihood of a rally.
Regardless, nothing is certain in the markets. If there is a breakout trigger and thereafter GE falls below the right shoulder of the bottom pattern, which is at $24.01, the breakout is considered a failure.
Potential near-term upside targets are marked on the daily chart in red. They are derived via the horizontal blue lines from previous support and resistance, combined with the confluence of two Fibonacci retracement levels. The first price zone is from approximately $27.00 to $28.10, followed by a wider price zone from around $27.90 to $28.19, and finally a higher price zone right around $29.00. Of course, the use of targets is relative to an investor’s time horizon. These targets have been mentioned to give some idea of where GE might get to in the foreseeable future if a bottom breakout occurs.
All data contained herein was gathered as of October 5th, 2017.
Author Disclosure: I have no positions in any of the stocks mentioned, but may initiate a long position over the next 72 hours if a breakout signals occurs.