General Electric Company (GE) stock is nearing strong harmonic support following a brutal 15-month downtrend, suggesting that it will soon enter a long-term bottoming pattern. While it isn't wise to expect a rapid recovery from the Dow Jones Industrial Average's worst performer, investors with multi-year time frames could book impressive returns while the centenarian company undergoes a long overdue rebuilding process.
The stock underperformed badly through 2016, slumping well below the 2000 and 2007 highs while other mega caps reached for the stars, posting record profits in reaction to the weak U.S. dollar and the Fed's quantitative easing program. Donald Trump's election triggered a major sell-off, with market players aggressively dumping General Electric shares and reallocating freed up capital into better performing equities.
Weak profits and a tone-deaf management team have added to downside pressure for General Electric in recent months, with the new board of directors including just three new candidates despite an obvious need to clean house. In addition, the company has just instituted a restrictive bonus policy despite years of dwindling profits, a cash crisis and an active SEC investigation into a $6.2 billion insurance loss, which has forced General Electric to restate 2016 and 2017 income. (For more, see: General Electric Axes Top-Executive Bonuses for First Time.)
General Electric Long-Term Chart (1990 – 2018)
The stock cleared three-year resistance at $6.50 in 1993 and took off in a strong trend advance that escalated into the new millennium. It posted an all-time high at $60.75 in August 2000 and turned sharply lower through the internet bubble bear market, dropping to a five-year low at $21.40 in October 2002. A bounce into 2004 failed to clear the .382 Fibonacci sell-off retracement level, stalling in the mid-$30s.
A 2007 breakout ended at the 50% retracement in the lower $40s, with that level marking the highest high in the past 11 years, ahead of a bone-crushing decline that raised bankruptcy fears. It bottomed out at $5.73 in March 2009 and bounced into the new decade, entering a shallow rising channel that added points at a lazy pace into the 2014 high in the upper $20s. An October 2015 breakout above that level marked a climax event, topping out at $33.00 in July 2016.
The subsequent decline broke 2016 support at $27.10 in July 2017 and cut through the August 2015 flash crash low in the upper teens in November. Aggressive sellers remain in control as we near the second quarter of 2018, but the stock is now trading just two points above the .786 retracement of the 2009 into 2016 uptrend. This marks strong harmonic support that could finally end the long-term downtrend.
The monthly stochastics oscillator has reached the deepest oversold technical reading since at least the 1960s, indicating that selling pressure could soon come to an end. While an initial bounce off support could be strong, it's unwise to expect a rally back into the $20s without a radical change in management, which appears unlikely. More likely, the bounce will mark the first stage in a basing pattern that may last as long as two years.
General Electric Short-Term Chart (2016 – 2018)
The steep downtrend has carved the rough outline of an Elliott five-wave decline, with price action now engaged in the fifth and final wave. It entered a descending channel in February after dropping vertically between $19.39 and $14.23, predicting even lower lows despite the plunge. An upside breakout from this small pattern could offer an early signal for a long-term change in character, perhaps after the stock trades through $12.00.
Price action has taken a severe toll on institutional sponsorship, dropping on-balance volume (OBV) to the lowest reading since the 2009 bottom. A test of that deep low is unlikely at this time, given dramatic selling intensity since October 2017, raising the odds that the downtrend is nearing its end. Conversely, steep resistance between $17 and $19 should slow or stall recovery efforts, perhaps keeping the stock range bound into the next decade. (See also: GE Options Traders Bet Stock Will Fall 15% Further.)
The Bottom Line
General Electric has been cut in half since December 2016, mired in a steep downtrend that is now approaching major support at $11.50. A bounce starting at or near that level could mark the first stage in a bottoming pattern that will take months or years to complete. (For more, see: GE May Be Dropped From Dow: Deutsche Bank.)
<Disclosure: The author held no positions in aforementioned securities at the time of publication.>