General Motors (NYSE: GM) is yet again testing the patience of investors as it has moved sideways for more than 2 months now. Adding to investors' dismay has been the underperformance of the stock even as the market has extended its winning run. But this tedious price action should (hopefully) not last for long, as the stock should eventually chase $40 in the coming weeks.
In my previous article titled General Motors: Should You Really Buy This Dip? I had recommended that investors enter long positions in the stock near $35 after it pulled back from the December-high of $37.74. As we know, the stock indeed dropped to $34.67 and immediately soared to meet my target price ($38) when it recorded a new 52-week high of $38.38. I had then said,
The upcoming retest could bring in fabulous returns to the buyers, similar to the retest it staged in November. However, it is worth mentioning that the selling pressure near $38 may be slightly hard to overcome for GM in the near-term. For an investor willing to devote at least 12 months, the stock may easily trade north of $40 and reward him handsomely.
We are witnessing this thesis play out well as the stock has been facing selling pressure near $38 and getting buying interest near $35. But, this narrow range will be beaten and technicals tell me that the breakout will likely be on the upside.
The weekly GM price chart suggests that after breaking out from its multi-year, narrowing range, GM has been struggling to cross the 76.4 percent Fibonacci retracement barrier near $38. The 61.8 percent Fibonacci retracement level near $35 is acting as the interim support.
When a stock breaks out from such a big range, it is normal to spend some time near the breached resistance to shake off the weaker hands. Until this breached resistance is respected by the bulls, there is simply no reason to worry.
One must also note that the stock had hit overbought levels in December after it raced from $32 to $37.74. So, what investors are now seeing is the cooling off action and a drop down in Relative Strength Index readings. The 14-week RSI value is now at 59.2167. Interestingly, the RSI has been trending upwards since August 2015 (see the chart above). This 18-month uptrend in RSI is unlikely to be violated anytime soon and following its lead, the stock should also do well to overcome the selling pressure near $38. Though it may sound overly optimistic, $40 can be achieved in the next 2-3 months.
But Why Is The Stock Struggling Near $38?
Every stock needs a boost, be it fundamental or technical. We saw a double bottom pattern earlier, the successful completion of which pushed the stock to $38. Investopedia.com defines this pattern as follows:
It describes the drop in a stock or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound. The double bottom looks like the letter "W". The twice-touched low is considered a support level.
I have marked the double bottom pattern and the related price target in the daily GM price chart below.
Since the stock has just finished the previous technical pattern, it awaits a fresh trigger to take the stock higher or keep it from falling. When the stock receives this trigger, it could easily cross the overhead resistance. The 14-week RSI value dropping to 50 could be one such technical trigger. Fundamentally, successful talks on divestment of GM's loss-making Opel brand to Peugeot could be the big news that bulls yearn for.
But, I Can Be Terribly Off In My Bullish Assessment
Even though the broader picture is bullish for GM, some investors are still waiting for levels closer to $30-$32 to make fresh investments. Is there a possibility for such a correction? There is always a probability for any sort of event in the stock market, though it may be considerably small.
The daily General Motors price chart tells us that the stock can fall to $32.00-$32.50 if the important support level of $35 is cracked decisively. Such a dramatic fall would torpedo the bullish sentiment in the near-term. I, on the contrary, believe there is a very slim chance of 12-15 percent decline in the stock. But, it will become even more possible if the broader market takes a U-turn.
The current consolidation in GM should end in the next 2-3 months and the stock should test $40. The technical set-up is still bullish and the strength readings are trending higher. Investors should continue to stay long in their position and ride the rally. GM needs a trigger, either fundamental or technical, to fuel the next leg of the rally.
In the event that the market topples now, GM will find it hard to sustain its ground. By this, I mean that the stock may pierce its near-term support of $35 and tumble down to $32.00-$32.50.
Note: I cover several stocks in different sectors as well as S&P 500, crude oil, gold and silver, U.S. dollar, etc. So, if you liked this update, and would like to read more of such informative articles, please consider hitting the "Follow" button above. Thank you for reading!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.