General Electric Company (GE) scraped the bottom of the Dow Jones Industrial Average performance list in 2017 and has dropped 25% so far in 2018, but its removal from the venerable average could signal a long-term bottom. In turn, the fallen giant may build support in the lower to mid-teens and turn sharply higher, posting superior returns into the new decade. This turnaround could surprise perennial bears who have already carved tombstones and written obituaries.
The monthly stochastics oscillator entered a long-term sell cycle at the start of 2016 and dropped into the oversold level in July 2017. It posted the most extreme bearish reading since at least the 1960s in March 2018 and turned higher, setting off a major buy signal when it crossed back above the oversold line this week. Although there are no guarantees, the new bull cycle could mark a generational low ahead of a multi-year uptrend. (See also: Pick the Right Settings on Your Stochastic Oscillator.)
The Dow removal has coincided with the buying signal, giving it a contrarian twist that bottom fishers may find irresistible. In addition, the stock is trading just above deep harmonic support at the .786 Fibonacci retracement level of the 2009 to 2016 uptrend. In turn, this suggests that sidelined players may still have an opportunity to buy the stock at a marginally lower price and sleep well at night. (For more, see: General Electric Stock at Cusp of Long-Term Bottom.)
GE Long-Term Chart (1998 – 2018)
The stock printed a multi-year top in the lower $40s in October 2007, following a five-year uptrend off the 2002 bear market low. That reversal unfolded nearly 20 points below the 2000 all-time high at $60.75, signaling the next leg in a long-term downtrend. It broke an 11-year double top pattern in 2008, descending to a 17-year low at $5.73 in March 2009, and turned higher into the new decade.
The rally stalled at the underside of the broken top in the lower $20s in 2011 and cleared that barrier in 2013, but rally progress failed to match broadly bullish action in major benchmarks. The uptrend stalled for nearly two years in the upper $20s before stair stepping into the low $30s in 2016 and dropping once again into a sideways consolidation. It broke new support in July 2017, entering a brutal downtrend that re-established resistance in the low $20s.
Selling pressure eased in March 2018 just one point above the .786 Fibonacci retracement of this decade's uptrend, yielding a bounce to $15.59 in May. Sellers returned at that level, dropping the stock into a test of the first quarter low, just in time for the Dow removal. An initial sell-the-news reaction fizzled out, and the stock gapped higher on heavy volume a few sessions later in a bullish reaction to company plans to spin off healthcare and sell the energy divisions.
GE Short-Term Chart (2017 – 2018)
On-balance volume (OBV) descended to the lowest low since 2009 in March 2018 and turned higher into May. It held above the first quarter low during the recent downturn, posting a bullish divergence while lending weight to a double bottom call. More importantly, selling pressure has ended at the .618 Fibonacci retracement of the accumulation wave between 2009 and 2016. It's rare when this indicator lines up with harmonic levels, and it's usually significant when it does.
Bottoms take time to form, and there's no magic outcome at work here. Rather, sellers have sold, and the company is engaged in a major recovery effort that will take time to reward new shareholders. However, downside looks extremely limited at this point, supporting long exposure that can be expanded over time, especially if the stock spirals into a selling climax at Fibonacci support near $11.50. (See also: GE Plans to Spin Off Health-Care Unit, Sell Baker Hughes Stake: Report.)
The Bottom Line
Long-term cycles indicate that General Electric stock has finally bottomed out and will enter a new uptrend after it completes a basing pattern in the low to mid-teens. (For additional reading, check out: GE's Debt Reduction Unlocks Value: Oppenheimer.)
<Disclosure: The author held GE shares in a family account at the time of publication.>