Ignore The Headlines -- The Time To Buy GM Is Now

Tuesday, July 1, 2014 - 3:45pm

by Serge Berger

General Motors (NYSE: GM) continues to reel from its seemingly constant string of recalls. On Monday, the company announced its latest -- six new recalls affecting about 7.6 million vehicles. 

Yet, the stock has reached an interesting inflection point on the charts, which now offers traders a good long-side setup.

In recent months, the news has focused on the company's failure to detect a faulty ignition switch, which resulted in deaths and the company's recalls of millions of vehicles. 

From an investing standpoint, however, traders need to separate reality from perception. Getting hung up on the headlines could cause you to miss out on profits. 

Successful trading depends on one's ability to put emotions aside and stick to a predetermined trading plan. Along the same lines, traders must be able to tune out the noise and focus on the news and price action that matters.  

In the case of GM, some worry these massive recalls could bring about the second downfall of the company, but it is important to understand GM's recent history and its relationship with the U.S. government. 

When GM crumbled into bankruptcy under a mountain of debt during the financial crisis, Uncle Sam came to the rescue. In return for bailing out the company, the U.S government received a 61% stake. 

On Nov. 18, 2010, roughly a year and a half after the stock market bottomed, GM completed the largest initial public offering in U.S. history when it sold around 478 million shares to the public at a price of $33 per share, as well as a good chunk of preferred shares. That day, the U.S. government's stake in GM dropped from the aforementioned 61% to about 27%, and by late 2013, it sold the last of its shares in the company. 

The takeaway here is that considering the government's previous involvement with GM and the amount of GM shares held in retirement portfolios around the country, it is almost inconceivable that GM would be allowed to go out of business thanks to a faulty ignition switch and vehicle recalls. 

With that in mind, investors should focus on price action -- because as I always say, price is the only thing that gets traders paid.

Looking at the weekly chart dating back to the 2010 IPO, in the bigger picture, GM remains constructively postured despite its vehicle recall issues. 

After topping in December, GM slipped quickly, falling nearly 25% by the time it bottomed in April. In the process, the stock broke its late 2012 uptrend line and traced out a head-and-shoulders pattern.

This bearish pattern has not yet been triggered, however, by a break below the April lows. And while traders should keep an eye on it, it's crucial to understand that when a head-and-shoulders pattern fails to be triggered, it often results in a strong bullish move.  

On the daily chart below, note that since the bottoming process began in March with the extreme low in April, the stock developed an inverse head-and-shoulders pattern. This bullish pattern was triggered in early June when GM pushed past its neckline resistance.

Over the past few weeks, the stock developed a tight and constructive consolidation pattern above the neckline, which now stands a good chance of resolving higher and pushing GM into the high $30s.

Action to Take -->
-- Buy GM on a daily close above $37.05
-- Set stop-loss at $36
-- Set initial price target at $39.50 for a potential 7% gain in three to six weeks

This article was originally published at ProfitableTrading.com:
Forget the News; the Chart is Telling Us to Buy This Troubled Stock

Amid the flurry of recall headlines, GM's strong 3.3% dividend yield may be easy to overlook. Fortunately, my colleague Michael Vodicka has developed a perfect strategy for capitalizing on reliable dividend payers, multiplying their income yields while waiting for the chance to buy them at a huge discount. To learn more about this Income Multiplier strategy, click here.

Serge Berger does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.