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General Electric: Profit from the Trading Bands

We're into earnings season yet again and the industrial sector faces the unpleasant truth: Though President Barack Obama claims his administration was "ahead of schedule and under budget" on the first of thousands of infrastructure projects that are part of his $787 billion stimulus plan, those upgrades of highways, bridges and transit systems do not appear
to be providing much immediate help to U.S. manufacturers.

Things are so uncertain, in fact, that General Electric, parent company of CNBC, has stopped providing specific per-share profit guidance, instead sketching out a "framework" of how it expects individual divisions to perform.

(See video of Daryl Guppy charting General Electric)

What do the charts say about about the venerable stalwart of Wall Street? Well, the downside target of between $4 and $6 identified in my February 24 column on General Electrichas been achieved. Traders are now watching for a rebound to develop between $4 and $6 and, many hope this will signal the end of the GE power failure.

The key feature for a trend reversal is NOT just the development of a rally. When the rally develops, we also need to see a compression and uptrend in the short-term Guppy Multiple Moving Averages (GMMA). Additionally we look for compression to develop in the long-term GMMA.

There are two aspects to GE analysis. The first is to identify the potential for a long-term change in trend. The second is to identify the trading opportunities which are not dependent on a change in the trend. Nerves start twitching with a move from $7 to $14 because 100 percent returns are not common in this market.

The potential for long-term trend change is very low. We use the GMMA display to understand the strength of the trend. The long-term GMMA is well separated. This shows investors remain sellers. They are actively selling into the price rallies. When they start buying, the price rallies and the long-term GMMA will compress.

guppy_GE.jpg

The separation between the two groups of averages confirms the strength of the downtrend. This trend strength will not necessarily drive GE below $4, but it limits the rally activity and slows the change to an uptrend.

This is confirmed with the short-term GMMA which indicates the thinking of traders. The consistent separation shows steady selling. Compression in this group indicates rally activity. Good rally activity develops compression and crossover behavior which lifts the short-term GMMA to the level of the long-term GMMA. No trend change is probable until the gap between the two GMMA groups is closed.

The usual pattern of trend reversal includes a series of tests and retests of the resistance area offered by the long-term GMMA. This has a low probability of developing in the immediate future.

Sound too bearish for GE bulls? Try this analysis another way.

Turn the chart upside down. Now the price action appears as an uptrend. Let your bullish bias go to work. It's clear there is a very low probability of a change to a downtrend.

This up-side down view confirms the current trend strength and the low probability of trend change. Return to chart to its correct aspect and this confirms the analysis of a rally and consolidation pattern development rather than a trend change.

Investors may have to wait a long time for a return from GE. Traders, on the other hand, will have much more fun and profit. A trend change is usually preceded by a consolidation pattern rather than a ‘V’ shaped recovery.

More from Charting Asia

Evidence from other markets suggests the most common consolidation pattern is a relatively broad trading band. It's too early to know for certain, but a trading band could develop between $6 and $14 to $15. The lower edge of this band is consistent with the long-term support level identified in our February notes. The upper edge near $14 is an estimate based on the small consolidation area. The placement of the upper level of the consolidation band is confirmed by the high of the current rally prior to the retreat.

Whether its $12, $14, $15 or higher is not important. It’s the character of the consolidation band that excites traders -- these are 80 percent or better returns available from trading between the consolidation bands. These returns do not depend on a change in the trend. GE hasn't restored power and turned on the lights, but there are some sparks.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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