One of the most common questions I receive from clients and traders is, What is the best indicator to use for signalling trend changes and avoiding false signals? My answer is that there isn’t a bulletproof go-to indicator or system, and don't believe anyone who claims there is. In my analysis work, I have a basket of indicators that I look at, and the more indicators that align to indicate a trend or a change, the greater the confidence I have in the potential move.
For traders, it’s not just important to analyze what is happening technically, but also why market participants’ attitudes may be changing in order to understand whether a move is market noise or something more significant.
Chart source: TradingView
Since the middle of May, GM shares had been trending upward, advancing from support near the $32 level to a recent peak near $36.50. By late July, the stock had started to encounter resistance and then turned sharply downward on August 1. On Tuesday, shares broke an uptrend support line and recent support near $35.35, broke the $35 round number and also broke their 50- and 200-day averages on the way down toward $34.70.
Each of these breaks could be seen as bearish; the combination of several negative events sends a strong signal that bears have moved in to the market. In addition, the Relative Strength Index (RSI) indicator has broken down below 50, confirming the downturn in the share price by signalling a downturn in momentum.
The tipping point for the sudden shift in sentiment was the news that General Motors’ July sales fell by 15% from a year ago, much worse than the 8% decline the street had expected. The company also indicated that rather than increase sales incentives, it has decided to cut production to reflect slowing demand. Other automakers confirmed a slowdown in auto sales with Fiat Chrysler (FCAU) sales falling 10% and Ford (F) sales falling 7.4%.
The Bottom Line
Tuesday’s trading is a clear case of fundamental developments and technical indicators aligning to signal a significant trend change. In this case, GM has clearly broken down and remains vulnerable with next potential support near $33.75, a level which held through much of June, then the May lows near $32.00.
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