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General Motors stock: Cheap got cheaper – still not a buy (NYSE: GM)

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Price Action Thesis

We trusted General Motors (NYSE: GM) from August last year until we decided to reduce all exposure in March and rotate. Undoubtedly, the company is one of the leading car manufacturers in the United States, with an illustrious history. It has an ambitious roadmap for electric vehicle transformation under the leadership of CEO Mary Barra. It also aims to challenge Tesla (TSLA) and Ford (F) for global electric vehicle leadership over the next decade.

Still, the stock is down nearly 48% from its January highs. Therefore, we wondered what we had done wrong that the market knew and we didn’t. We noted that GM stock was trading at an NTM normalized profit of 10.6x, even at its peak in January. Therefore, it was still well below the market P/E. However, that hasn’t stopped the stock from hitting levels last seen in late 2020, digesting all of its 2021 gains.

Therefore, it was a humbling experience for us. Especially since we had the skills to analyze price action, but were not using them effectively. Instead, we had focused more on its history and analyst ratings, at our peril. As a result, our GM ratings were below average and we are keen not to repeat our previous mistakes.

We explain why using proper analysis of price action can help investors recognize market intentions and avoid such difficulties in the future. We also present critical levels that investors should consider moving forward.

As we did not see any noticeable price action from the bearish trap, coupled with another bullish trap after its double top, we are revising our rating on GM action from Buy to Hold.

We should have paid attention to those double top traps

GM Price Chart (Monthly)

GM Price Chart (Monthly) (TradingView)

Investors can look to the monthly chart above and watch for double top traps in June 2021 and January 2022. These traps formed, following a wave of optimism in GM stocks. In June 2021, the company telegraphed the first in its $35 billion electrification planwhich saw GM’s stock surge into its first double-top bull trap.

Notably, the market’s ability to price critical events in advance is incredible. Investors can easily discern the surge from its COVID low that has helped GM stock to new highs in 2021, in contrast to its lukewarm consolidation pattern before. Therefore, we urge investors to watch price developments closely and not just buy into the hype/news/analyst updates. Investors should exercise due diligence and independent analysis.

The second bullish trap formed after the “end stream”, attracting buyers who attended GM’s Investor Day as it highlighted its ambitions as a platform innovator (see our previous article) . As investors applauded the company’s plans, the market attracted the final round of buyers before setting the second double-top bull trap in January 2022.

Having a double top bull trap is bearish enough. Having to face two double tops at the same resistance level clearly shows the failure of the buying momentum. What happened after the second double top bull trap was a strong sell off as the market digested those massive 2020-21 gains.

The short-term trough is tenuous

GM Price Chart (Weekly)

GM Price Chart (Weekly) (TradingView)

The weekly chart for GM stock fills in the necessary detail of our larger monthly chart framework.

As seen above, the price action of bullish double top traps is worrisome, as they indicate a higher likelihood of sustained trend reversals. Notably, the deep retracement after its first double top (June 2021) did not experience a sustained trend reversal. Notably, GM stock was also supported by a bear trap price action signal. However, we generally give less importance to a bear trap that occurs after a double top.

However, the second bullish double top trap (January 2022) broke the camel’s back, sending GM stock into negative flux (decisive bearish momentum). Note the failed bear trap after its second double top. As mentioned, the initial bearish trap price action after a powerful double top is usually unreliable. Subsequently, the GM stock also had another bull trap in late March, setting its intermediate resistance.

GM stock is at near-term lows, as it had attempted to consolidate over the past four weeks. However, we have noticed that the buying momentum has come up against strong resistance and has been contained so far. Additionally, we have not seen any double dip bearish trap price action that could help reverse its bearish momentum.

Given its negative flow and prior double top price action, we prefer to watch a bearish double bottom trap before being convinced of a higher probability setup for a potential trend reversal.

Is GM stock a buy, sell or hold?

GM investors have claimed the stock is relatively cheap, discounted to market and premium to Tesla. But that hasn’t stopped the market from fully digesting its massive 2021 gains.

Therefore, we believe that investors should keep a close eye on price action to watch for clues the market is giving us about its future intentions. We have learned from our mistakes and will not repeat them.

We revise our rating on GM stocks from Buy to Hold and wait for a clear price action signal. We will reassess our rating if a significant price action signal develops in the future.