General Motors at 7-Month High After Strong Quarter

General Motors Company (GM) shares rallied more than 4% to a seven-month high above $41 in Wednesday's pre-market session after the automaker beat fourth quarter expectations by wide margins and reaffirmed fiscal year 2019 EPS guidance. The buying spike lifted the stock within six points of the all-time high recorded in October 2017, triggering the fifth test of resistance in the $40s since the 2010 initial public offering.

General Motors stock is acting better than rival Ford Motor Company (F) but still holds a lower multiple at 6.3x forward earnings compared to Ford's 7.1x. GM shareholders have been encouraged by aggressive action to build a stronger product line as well as restructuring efforts that have generated political and union headwinds in reaction to announced layoffs and factory closures. This buy-the-news reaction could support even higher prices in the coming months, but multiple reversals in the $40s demand a cautious approach. 

GM Monthly Chart (2010 – 2019)

The company came public in the mid-$30s in November 2010 following its emergence from Chapter 11 bankruptcy. The rally peaked just above $39 two months later, giving way to a downturn that continued into the 2012 low at $18.72. That marked the lowest low in the past six years, ahead of an uptick that gathered force through 2013, stalling less than two points above the 2011 high. Sellers took control once again in 2014, grinding out a multi-wave decline that continued into the August 2015 mini flash crash.

That session's deep low at $24.62 finally ended selling pressure, ahead of quiet range-bound action that continued through the second quarter of 2016. Committed buyers then re-emerged, lifting the stock in a stair-step rally that posted an all-time high at $46.76 in October 2017. Subsequently bearish action carved a five-month descending triangle top that broke down in February 2018, generating a steep downtown that reached a two-year low just above $30.00 in October 2018.

The monthly stochastics oscillator completed a double bottom reversal between April and September 2018, turning higher in a buy cycle that still hasn't reached the overbought zone. The crossover has improved weak sentiment while CEO Mary Barra tackles high operating costs and political interference, taking needed steps to increase shareholder value. These efforts should underpin the upside, but sales will ultimately dictate long-term performance in this classic cyclical play.

GM Daily Chart (2015 – 2019)

A Fibonacci grid stretched across the uptrend between 2015 and 2017 highlights a volatile 2018 correction that tested support at the .618 retracement level in October and December. The weekly stochastics oscillator entered a buy cycle following the December reversal, setting off a bullish convergence with the monthly indicator. This bodes well for continued gains into the black trendline of lower highs near $43.

The on-balance volume (OBV) accumulation-distribution indicator surged higher in April 2017, reaching an all-time high with price in October. Subsequent selling pressure eased in May 2018 even though the stock didn't bottom out for another six months. It has jumped back to the 2017 high in recent weeks and could break out if bullish action continues for a few sessions. In turn, this would generate a bullish divergence that may presage an eventual breakout.

Even so, the stock has struggled above $40 many times since 2011 and is trading in that price zone once again on Wednesday. Skepticism is advised because market players see this bearish pattern, raising the odds for aggressive short selling as price grinds higher. Given this complex price structure, a buying spike above the black trendline in the mid-$40s is needed to improve the long-term outlook, which seems unlikely for a cyclical stock near the end of a long economic expansion.

The Bottom Line

General Motors stock is trading higher after a strong earnings report, but aggressive market players could reload short sales in the $40s.

Disclosure: The author held no positions in aforementioned securities at the time of publication.