(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of General Motors Co. (GM) could be set to fall by nearly 11% using technical analysis, to a price of roughly $38, while an options trade indicates a bearish bet being made as well. Shares of the automaker have risen by almost 25% since early June, and one point reached a price of about $46. But since October 24 shares of the stock have retreated, some falling back to its current price near $43. (For more, see also: General Motors 2Q Earnings: What to Watch For.)
One trader made a significant bet in the options market on November 14—that the present decline is likely to continue. The 10,000 put contracts at the $40 strike price set for expiration on December 15, traded at a price around $0.40. The trade implies that shares of GM would have to fall to a level of $39.60 just to break even, meaning the trader is looking for steeper declines.
Shares of GM broke out of a long-term downtrend at the end of 2016, and shares have been able to rise steadily throughout the year. With that breakout, the stock had been able to increase fairly regularly through the end of August. At that point shares of GM began to rise at a much quicker pace, which means the move higher had become overextended. (For more, see also: The Top General Motors Shareholders.)
A pullback is likely to bring shares of GM down to a price of $38, a decline of about 11.5% from the current stock price around $43. But $38 is likely to represent a floor in the stock, as that price has two significant levels that could offer strong technical support. First, the chart shows a technical support level, which dates back all the way to 2014. The stock tried on five occasions to rise above $38 over the past three years before finally rising through the price level in September. Once the stock broke through the $38 price, it was able to rapidly go on to rise to $46.
Second, the shares have a long-term uptrend in place that dates back to August of 2015. The uptrend has offered technical support on many occasions as well, as GM has risen over the years. It is likely this time will be no different.
GM shares have had a mighty good run so far in 2017, and although a pullback to $38 is likely to come, the stock price should be met with plenty of support.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.