General Motors Company (GM) shares fell more than 3% on Friday, just one day after the company reported a 1% January year-over-year sales increase, powered by strong Buick and GMC results. A possible gas tax increase and continued anxiety about NAFTA's future contributed to the decline, which dropped the stock to a seven-week low. Traders should look for sellers to prevail into the company's Feb. 6 earnings report, although GM preannounced at the high end of expectations on Jan. 16 while forecasting 2018 results in line with current consensus.

GM is sharply outperforming rival Ford Motor Company (F), which reported an ugly 6% year-over-year January decline, continuing a string of bearish news that has dropped the stock more than 20% since it topped out at a 52-week high above $13 in mid-January. Ford stock is currently testing two-year support near $10.50 and could break down in the coming weeks, entering its first major downtrend since 2012.

U.S. auto industry sales fell 2% in 2017, failing to overcome heathy comps driven by a multi-year expansion. Rapidly rising interest rates are expected to cut into 2018 results, compounded by a growing inventory of late model used automobiles. Taken together, it is possible that the sector has already passed a cyclical peak, setting the stage for several years of contracting sales and lower stock prices. (See also: How the U.S. Automobile Industry Has Changed.)

GM Weekly Chart (2013 – 2018)

General Motors shares topped out at $41.85 in December 2013, following a strong rally impulse that exceeded the 2011 high by less than three points. The stock then entered an expanding wedge pattern, characterized by progressively volatile lows, finding support in the mid-$20s in August 2015. It tested that level twice in 2016 and took off in a fresh trend advance that broke a three-year trendline of lower highs in December.

The stock bounced along trendline support for nine months and surged higher, breaking out above the 2013 high in October. The rally stalled just three weeks later at $46.76, giving way to a shallow decline that has drawn the outline of a bull flag pattern, with support at the breakout level getting tested repeatedly. The recent sell-off has brought that level into play once again, while the flag pattern raises the odds for continued downside into the 200-day exponential moving average (EMA) at $39.50.

That selling impulse will set off failed breakout signals but could mark a short-term exhaustion event, with flag and moving average support generating a significant bounce. Long-term bulls then need to hold the line or risk a breakdown and downtrend that could last for many months while dropping the stock into the lower $30s. Buyers hold the technical advantage at this point because the third low in a bull flag pattern typically generates a buying opportunity. (For more, see: GM's New Chevy Silverado Bids for More U.S. Pickup Profits.)

F Weekly Chart (2011 – 2018)

Ford stock posted a 10-year high at $18.97 in 2011 and sold off to $8.82 in 2012. It tested range resistance in 2013 and 2014, with aggressive sellers denying both breakout attempts. A slow-motion decline then set into motion, with the stock testing intermediate support near $10.50 five times between 2015 and 2017. It has just entered its sixth test after a vertical two-week decline, with the strongest selling pressure in more than two years raising the odds for a breakdown that generates a more critical test at the 2011 and 2012 lows.

Traders should look for at least one strong recovery wave before a breakdown because the vertical sell-off trajectory is unsustainable. The stock cut through 200-day EMA support at $12 during the rout, with resistance at that level now marking a high-odds bounce target. Short sellers interested in playing a breakdown may consider positions at or near that level, especially after a high-volume reversal.

The Bottom Line

General Motors and Ford shares are selling off, with higher interest rates and a healthy supply of used autos likely to undermine 2018 profits and revenues. (For additional reading, check out: Analyzing Auto Stocks.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>