U.S. automakers have lifted off corrective lows following reports of Chinese trade negotiations, but dip buyers should remain cautious because these cyclical issues have incurred technical damage in recent months, breaking bullish patterns and entering potential downtrends. At a minimum, it is wise to let other folks risk their hard-earned capital at this juncture while the rest of us watch price action from the sidelines.
In addition to tariff threats and higher steel prices, automakers must contend with an aging economic cycle that is undermining comparative monthly sales. Many analysts believe that the group has already posted a cyclical top, exposing a long-term downtrend when broader economic growth slows or stalls in coming years. Volume action in the biggest players confirms those bearish convictions, with institutions quietly closing out long-term positions. (See also: How the U.S. Automobile Industry Has Changed.)
General Motors Company (GM) shares rallied above the 2011 high in the upper $30s in 2013 (red line) but reversed quickly, entering a three-year rounded correction. The stock returned to the contested level in the first quarter of 2017 and pulled back into the summer months, carving a higher low ahead of an October buying surge that reached an all-time high at $46.76. Pullbacks to new support got bought in November and December, while February's plunge set off failed breakout signals.
Price action since mid-January has carved a small-scale Elliott five-wave decline into the 200-week exponential moving average (EMA), raising the odds for a multi-week bounce, but aggressive sellers are likely to reload positions as the price approaches heavy resistance between $38 and $41. That doesn't offer adequate reward for long-term positions, especially in a news-driven environment that could trigger even lower lows. A more effective entry strategy will be to wait until the stock closes back above the blue failed breakout zone. (For more, see: Why GM's Stock May Stage a Sharp Rebound.)
Ford Motor Company (F) tested the 2011 high in the upper teens in 2013 and carved a double top pattern that broke to the downside in the second half of 2014. The stock has been engaged in a choppy but shallow downtrend since that time, repeatedly testing the low posted during the August 2015 mini flash crash. It undercut that level in February, hitting the lowest low since 2012. Accumulation/distribution readings have matched dismal price action, losing ground in an endless capitulation.
This perennial laggard has held harmonic support at the .786 Fibonacci retracement of the 2012 to 2014 uptrend for more than two years, suggesting a long-term bottom, but committed buyers are nowhere to be found. There's no sense bottom fishing or holding for the long haul because the limp pattern is unlikely to produce more than one or two upside points before bears attempt to break support once again.
[To learn more about Fibonacci retracements, check out Chapter 6 of the Technical Analysis course on the Investopedia Academy]
Tesla, Inc. (TSLA) stock stalled above $260 in 2014 following a momentum-fueled advance that added more than 200 points in less than one year. Rally attempts failed into early 2017, carving a resistance zone up to $285, ahead of a powerful April breakout that reached an all-time high at $389.61 in September. Bulls have prevailed in three tests at new support since that time, including this week's bounce at $291.
The company is better positioned than its more productive rivals because the powerful uptrend isn't dependent on the aging economic cycle. Even so, this stock carries major risk due to high cash burn and the excruciatingly slow rollout of the Model 3. Fortunately for bulls, it is still in breakout mode, and a little good news on the production front could ignite a blistering short squeeze. (See also: Does Tesla Have Enough Cash for Model 3 Production?)
The Bottom Line
Selling pressure in U.S. automakers looks washed out after steep declines, raising the odds for oversold bounces, but broken technical patterns could easily translate into lower lows in the coming months. (For additional reading, check out: 6 Stocks for the Electric Car Boom Not Named Tesla.)
<Disclosure: The author held no positions in aforementioned securities at the time of publication.>