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GE bulls win the battle of the 'breakaway gap,' and that may have won them the war

MARKETWATCH 7:50 AM ET 5/11/2018
Symbol Last Price Change
GE 14.69 0 (0%)
QUOTES AS OF 04:00:21 PM ET 05/10/2018

An 'inverted head and shoulders' pattern after passing a big test of support suggests the stock may have already bottomed

For those wondering when General Electric Co.'s(GE) stock will finally hit bottom, the stock's passing of a big test of support and two widely known bullish reversal patterns suggests it already has.

To confirm a change in trend, especially one that has been as powerful and long-lasting as the downtrend in the industrial conglomerate's stock (GE), takes more than a couple of bullish chart signals.

There also needs to be confirmation, often through a rigorous test of support. That's to make sure the reversal signals aren't just setting a "bull trap," which is a false upward move that, instead of starting a new trend, often ends up being the final rally before a renewed selloff to lower lows.

After bulls successfully defend support, they have to start taking the initiative by breaking through overhead resistance.

Over the last few weeks, since GE reported better-than-expected first-quarter results (http://www.marketwatch.com/ story/ge-profit-and-revenue-top-estimates-stock-soars-2018-04-20), the stock has done what is needed to flash a longer- term buy signal, by producing a "breakaway gap," passing several tests of support and confirming a bullish "inverted head-and-shoulders" reversal pattern. Now all the bottom thesis needs is a little follow-through.

Don't miss: Investors shouldn't get ahead of themselves on General Electric(GE) (http://www.marketwatch.com/story/ investors-shouldnt-get-ahead-of-themselves-on-general-electric-2018-04-20).

'Breakaway gap' jump starts the rally

After a surprisingly strong earnings report before the April 20 open, the stock produced an upside "gap" in the charts, in which the intraday low ($14.34) was above the previous session's intraday high ($14.06). In a strong downtrend, bears don't usually get blindsided, and bulls lack the strength to push prices above market levels.

Importantly, the stock gapped above a 7-month downtrend line, as well as the widely-followed 50-day moving average (http://www.marketwatch.com/story/ges-stock-surges-above-key-technical-level-into-correction-territory-2018-04-20), which many chart watchers use to define the short-term trend. That created one of the more bullish technical patterns called a breakaway gap (http://www.marketwatch.com/story/breakaway-gap-suggests-mcdonalds-stock-has-started-a-new- uptrend-2015-10-22).

"Breakaway gaps occur when price suddenly breaks through a formation boundary and signals the beginning of a trend," according to a report of a study conducted by the CMT Association. "These are thought to be the most profitable gaps [to trade]."

What's also encouraging from a technical standpoint is that the bullish breakout did not occur in a vacuum.

Bullish divergence gave an early hint

While the stock was still making lower lows in late April, the momentum indicator, which tracks the rate of change in price over a specific time frame, had already been making higher lows for the past couple of months.

This pattern, known as bullish technical divergence (http://www.marketwatch.com/story/energy-stocks-finally-break- away-from-suppressive-downtrend-line-2017-07-20), suggests each push lower was taking more out of the bears. While divergences aren't usually good market-timing tools, since they could last for long periods of time, they do warn against fighting a trend reversal when it occurs.

The big battle at gap support

It's normal for bears to scoff at the break of a 7-month trendline, within a near 2-year downtrend. Wall Street's fundamental analysts haven't bought into the recent rally either, as the average rating of 17 analysts surveyed by FactSet is the equivalent of hold.

So bulls had to prove it.

Breakaway gaps usually provide very good support, since those that missed the chance might be happy to buy on a dip, while bears who sold below the gap might be happy to close out of those positions when given the chance.

If bears had successfully filled in the gap, with the stock closing below the April 19 close of $13.99, it would have suggested bears had regained the initiative. As the following chart shows, bears made several forays below $13.99, and even managed to close below that level on May 3, but bulls remained resilient.

The stock's quick bounce back above $13.99 on May 4, and the subsequent rally was a sign that bulls had won the battle of support.

Success, failure and capitulation in one pattern

The kicker for GE bulls is that on Wednesday, the stock broke through "neckline" resistance, to complete a bullish " inverted head-and-shoulders" reversal pattern.

The "head-and-shoulders" pattern is one of the best known and more respected chart patterns because it depicts the change in behavior and sentiment that tends to accompany the end, and then the reversal, of a long-term trend. Read more about head-and-shoulders patterns (http://www.marketwatch.com/story/teslas-head-and-shoulders-paints-a-bearish-picture- for-the-stock-2014-12-09).

The first shoulder and the head represent success of the trend, the second shoulder represents failure to continue the trend, and breaking the trendline the pattern is built on--the "neckline"--represents capitulation, meaning that the trend has ended.

On Thursday, the stock was down as much as 0.6% intraday, as it tested potential support at the neckline-break point at around $14.55, but then bounced to close up 0.5%. The stock has gained 14.5% since closing at a nine-year low of $ 12.83 on April 9, while the Dow Jones Industrial Average has gained 3.2% over the same time.

Some chart watchers will calculate a measured-move upside target for the stock, by adding the difference between the tip of the head, in GE's case the April 9 closing low, and the pattern's highest point, or the March 12 closing high of $15.10, to where it crossed above the neckline.

That would yield an initial target of $16.82, which is 14.5% above current levels, and 31% above the April 9 low. It would also take the stock above potential resistance at previous support around the late-January lows in the $15.80-to-$ 16.00 range.

What will the sell-side analysts be saying then?

-Tomi Kilgore; 415-439-6400; [e-mail]


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05-11-180750ET
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