Thesis Price Action
We had confidence in General Motors (NYSE: GM) from August last year until we decided to reduce all exposure to March and rotated. Undoubtedly, the company is one of the leading car manufacturers in the US, with an illustrious history. It has an ambitious electric vehicle transformation roadmap under the leadership of CEO Mary Barra. It also aims to challenge Tesla (TSLAand Ford (F) for the global leadership of electric vehicles over the next decade.
However, shares have lost almost 48% compared to January highs. So we wondered what we were wrong with that the market knew and we didn’t. We observed that GM shares traded with normalized NTM gains of 10.6 times even their highest in January. Therefore, it was still well below the market P / E. However, it did not stop the stock from reaching the levels last seen in late 2020, digesting all its gains from 2021.
So it was a humble experience for us. Even more so because we had the skills needed to analyze price action, but we didn’t use them effectively. Instead, we had focused more on its history and analysts’ assessments, at our peril. Therefore, our GM ratings performed below normal and we are prepared not to repeat our previous mistakes.
We discuss why using a proper price action analysis can help investors recognize market intentions and avoid these problems in the future. We also present critical levels that investors should consider to move forward.
Since we have not seen any significant price action from the bearish trap, along with another bullish trap after its double top, we are reviewing our rating of GM shares from Buy to Hold.
We should have paid attention to these double bull traps
Investors can group from the previous monthly chart and observe the double bullish traps in June 2021 and January 2022. These traps were formed as a result of an increase in optimism in GM shares. In June 2021, the company telegraphed the first of its $ 35 billion electrification plan, which saw GM shares rise to its first double top trap.
In particular, the ability of the market to set prices at critical events in advance is incredible. Investors can easily discern the increase in its COVID fund that helped GM shares reach new highs in 2021, in contrast to its previously lukewarm consolidation pattern. Therefore, we urge investors to keep a close eye on price action and not simply check for exaggeration / news / analyst updates. Investors need to do their due diligence and independent analysis.
The second bullfight was formed after the “final flow”, which attracted buyers who bought GM Investor Day, as it highlighted their innovative platform ambitions (see our previous article). As investors applauded the company’s plans, the market attracted the final round of buyers before setting the second double double trap in January 2022.
Having a double top trap is already pretty bearish. Having to deal with two double peaks at the same level of resistance clearly shows the failure of the buying momentum. What happened after the second top double trap was a strong sell-off as the market digested these massive 2020-21 gains.
The short-term bottom is weak
GM’s weekly stock chart fills in the necessary details of our broader monthly chart framework.
As seen above, the price action of upper double-tap traps is disastrous, as they indicate a greater likelihood of sustained trend changes. In particular, the deep setback after its first double top (June 2021) did not suffer a sustained trend reversal. In particular, GM shares were also supported by a bearish trap price action signal. However, we usually give less importance to a bear trap that occurs after a double head.
However, the second upper double bull trap (January 2022) broke the camel’s back, sending GM shares to a negative flow (decisive bearish momentum). Note the failed bear trap after its second double cap. As mentioned, the initial price action of the low trap after a powerful double top is usually not reliable. Subsequently, GM shares also had another bullish trap in late March, establishing their intermediate resistance.
GM’s shares are at a short-term low as they had been trying to consolidate over the past four weeks. However, we noticed that the buying momentum has met with strong resistance and has so far been overcome. Also, we haven’t seen a double bearish trap price action that could help reverse its bearish momentum.
Given its negative flow and the previous action of the upper double price, we prefer to observe a double bottom low trap before relying on a higher probability setting for a possible trend reversal.
Are GM shares a buy, sell or hold?
GM investors have said the shares are relatively cheap, priced at a discount to the market and heavily discounted against Tesla. But that hasn’t stopped the market from fully digesting its huge 2021 gains.
Therefore, we believe that investors should closely monitor the price action to control the tracks that the market is informing us about their future intentions. We have learned from our mistakes and will not repeat them.
We review our rating of GM’s actions from Purchase to Maintenance and expect a clear price action signal. We will re-evaluate our rating if a significant price action signal develops in the future.