Major U.S. automakers are stuck near 52-week lows ahead of General Motors Company's (GM) third quarter earnings announcement, which is unlikely to affect the macro theme of higher U.S. production costs and contracting foreign sales due to rising steel prices and the trade war with China. Broad-based selling pressure has added to sector woes, raising the odds that these issues have entered multi-year bear markets.
GM stock has acted better than that of rival Ford Motor Company (F) in recent years, but that isn't much of an endorsement, with GM generating negative returns since a rally topped out near $40 less than two months following its November 2010 initial public offering (IPO). Market players have chosen to allocate their sector capital to upstart Tesla, Inc. (TSLA) during this period, viewing Elon Musk's controversial enterprise as a better growth opportunity.
Ford beat modest third quarter estimates in an Oct. 24 report while affirming fiscal year 2018 guidance. However, the automaker warned that sector uncertainty and unexpected deterioration in European and Chinese sales would affect margins and return on investment into 2020. Of course, it's tough to fathom how those lost sales were viewed as "unexpected," given trade policy so far in 2018.
General Motors shares turned sharply lower after topping out near $40 in January 2011, descending into the upper teens in the fourth quarter. That marked the lowest low in the past seven years, ahead of a 2014 failed breakout attempt. The stock posted a higher low in 2015 and turned higher once again, reaching 2011 resistance for the second time in September 2017. An immediate breakout attracted modest buying pressure that posted an all-time high at $46.76 in October.
The subsequent downturn failed the breakout in February 2018, ahead of equally bearish action that reached the mid-30s before finding support in March. The stock drifted sideways for two months and bounced strongly, stalling less than two points under the 2017 high in June. A persistent decline since that time has completed a double top breakdown, with resistance now centered between $35 and $37.
Traders should watch this price zone for renewed selling pressure if earnings generate a buy-the-news reaction, with a skeptical eye on the unfilled July gap between $38 and $39 if buyers prevail and mount double top resistance. Accumulation has held up better than price in recent months, indicating a decent supply of bottom fishers who could support higher prices for longer than predicted by the deteriorating price pattern.
Shareholders had high hopes for Ford stock following a rapid recovery after the 2008 economic collapse. The stock posted a nine-year high at $18.97 in January 2011, marking the highest high in the past seven years, ahead of a decline that completed a double bottom reversal just below $9.00 in January 2013. The subsequent uptick stalled less than one point under the 2011 high just 10 months later, yielding renewed downside that has carved a long series of lower highs and lower lows into 2018.
The stock cut through the 2015 low at $10.44 in August 2018 and reached 2011 double bottom support in early October. It broke down and posted an eight-year low at $8.17 on Oct. 24 before turning higher into this week, settling at the 50-day exponential moving average (EMA) ahead of its rival's earnings report. Sellers could reload positions at any time, while continued buying interest is unlikely to lift this broken issue back into the double digits.
The Bottom Line
General Motors stock is deeply oversold following a four-month decline and could trade back into the upper $30s after today's earnings report. However, GM and rival Ford continue to carve bearish long-term patterns that predict lower prices in the coming years.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>