General Electric Stock Could Test 2018 Low

General Electric Company (GE) shares fell more than 10% on Thursday after Bernie Madoff's whistleblower said that the company was engaged in "bigger accounting fraud than Enron." The company responded forcefully, stating the claims were meritless, while CEO Larry Culp stepped up and bought $2 million worth of stock. A William Blair analyst has also chimed in, insisting that the accusations were old news and that GE can maintain liquidity while working through a massive reorganization.

The troubled conglomerate posted mixed second quarter results on July 31, beating profit estimates by a few cents while revenues fell 1.1% year over year. However, in-line fiscal year 2019 profit guidance failed to stir buying interest, triggering an intraday reversal and steady August decline that posted a four-month low just prior to the controversy, which has dropped the stock to the lowest low since Jan. 4.

Bottom fishers expected stronger action after December's 10-year low at $6.86 because many analysts viewed the stock as a 2019 turnaround play after two years of lower prices. However, GE's broad-based reorganization has failed to greatly improve the dismal profit outlook, forcing newly minted shareholders back to the sidelines. Unfortunately for remaining bulls, time may be running out because heavy cyclical exposure is vulnerable to an economic downturn.

GE Long-Term Chart (1990 – 2019)

The stock broke out above the 1987 high at a split-adjusted $5.21 in 1992 and entered a historic uptrend that posted steady gains into the August 2000 all-time high at $58.41, ahead of a steep downturn when the internet bubble burst. The decline settled in the low $20s in 2002, yielding a 2003 test that completed a double bottom reversal. The subsequent uptick stalled in the mid-$30s in 2005, while a 2007 breakout made little progress, ending just above $40.

That marked the highest high in the past 12 years, giving way to an aggressive decline that accelerated into a near death spiral during the 2008 economic collapse. The stock finally bottomed out at $5.50 in March 2009, marking a price level that came back into play in the fourth quarter of 2018. The GE Capital division posted heavy losses during this period, attaching a dead weight the company has failed to overcome, even though it sold the unit in 2015.

Even so, the subsequent recovery wave posted healthy upside, finally stalling in the lower $30s in the summer of 2016. Aggressive sellers took control about nine months later, grinding out a steady downtrend that cut through major support levels like butter into the fourth quarter of 2018. The decline ended less than a point above the 2009 low in mid-December, yielding a weak 2019 bounce that failed to pierce the shallow .214 Fibonacci retracement level.

The monthly stochastics oscillator stuck like glue to the oversold level before crossing into a buy cycle at the start of 2019 and has now crossed to the downside before reaching the overbought zone. This is a tough call because it could be a false sell signal, ahead of a final push into that extreme level. It doesn't matter much at this point because there's no reason to buy the stock until it breaks out above the current 2019 high at $11.30. 

Unfortunately for bulls, accumulation-distribution readings are now deteriorating rapidly, indicating that bottom fishers have given up and headed back to the sidelines. In addition, there is no evidence of institutional buying so far in 2019, telling us that smart money is sitting on its hands. In turn, this greatly increases the odds for a retest at the December low, with a breakdown exposing 2009's historic low at $5.50.

The Bottom Line

General Electric stock has broken down from a seven-month trading range after failing to mount the 200-day exponential moving average (EMA) and could break down to multi-decade lows in the coming months.

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