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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets
At the beginning of November, we commented on GM, arguing that the stock could reach $ 40. It has not been a long time, yet there have been many key events that have increased the volatility of General Motors' shares. Currently, any major increase is unlikely, since Donald Trump is now taking part in this.
Until recently, things were fairly in line with the technical analysis, with the headline correcting at $ 33.80 and then rising to $ 40.
See the prediction table we made on November 2, below:
However, on November 26th, GM announced its cost reduction campaign that included firing up to 15 percent of its employees and approximately 25 percent of its operations, as well as closing its plants in Michigan, Maryland and Ohio in the United States and Ontario, Canada.
This was bad news for the families of the fired employees, but investors liked it, which pushed the stock up 5% into a single trading session.
This job cut is obviously not in line with Trump's policy; while the president of the United States is trying to bring production back to the United States by cutting tax rates, GM is closing factories based in the United States, while maintaining those in Mexico and China. Trump eventually said the US government could cut tax exemptions for GM,
And this can be well understood. This is not just about cutting jobs. In 2009, the US government paid $ 30 B just to save the company, which then became public immediately after bankruptcy. Now, 9 years later, GM is closing its factories based in the United States, but still maintains those in Mexico, where even the local government took part in the company's rescue.
GM reacted to the president's words with a commentary on the fact that the trade wars conducted by Trump have made imports of steel and aluminum more expensive, which meant that the exported GM products were no longer as competitive as before. The main reason lies, however, in the bad sales of cars. The third quarter earnings report was good, but not because sales were high; rather, it was because car prices have increased.
By reducing production, GM will save about $ 6 billion, doubling its investment in the development of electric cars, including those without drivers.
The only company that wants to increase production capacity in the United States is Tesla, and because of this, the GM news is very good, as the company could buy the factories closed and start producing Tesla cars there. This boosted Tesla's stocks by over 1%. It would increase much higher if GM's decision was final, but it is not.
GM could still maintain factories based in the United States, closing only those in South Korea next year. However, it remains to be seen whether the economic and social pressure will induce GM to reverse its decision or to extend its factories in North America.
If this is the case, it will be a mutual advantage, as investors will get a higher share price, the government will keep jobs and GM will get additional privileges.
However, GM could still close the US factories, and in this case, nothing can be predicted with certainty. However, Trump's policy is unpredictable and his threats to GM who lose his tax-exempt privileges could come true. GM will still have the positive effect of short-term factories, but in the long run, the company's activities in the United States may suffer a lot. In this case, everything will depend on the factories in the rest of the world, where GM has better conditions.
Therefore, fundamentally, the outlook is uncertain and somewhat negative. Let's see what we can do here with some technical analysis.
Support and resistance levels are essential here. The resistance to $ 37 was formed after the earnings report and was active for about a month. During this period, a key support appeared at $ 34, then other support levels were formed at $ 35 and $ 36, which eventually broke resistance at $ 37.
It was discovered for the first time when the news about the job cut came, but then the criticism of Trump corrected the price; yet, it was soon again near $ 37.
Therefore, the relationship led to a strong demand for GM shares, which was followed by consolidation, as all positions had been taken and the market needed new buyers. Nobody wanted to buy for $ 37, so the price returned to $ 34, where it had been before the report was published.
This motivated investors to buy at this good price and the stock rose rapidly.
As the price was rising, new levels of support were forming, which could signal an uptrend. A new support has been formed at around $ 35, which means investors did not expect any major setbacks.
When the news about the GM job cut came out, new buyers came in, pushing the stock over $ 38. Those who were late to buy were waiting for a pullback to buy at a better price, which formed another support for $ 36. The price then rose to $ 37, where it is currently.
All this means that investors have added long positions in GM in the last two months, the float is very low, only 1.99%.
A large amount of long has an inconvenience: in the event that most investors decide to stop, this will lead to a sharp decline. Therefore, it is important to find the expected exit point.
To find it, you should determine when the stock has become popular. This can easily be found when the earnings report has arrived.
This particular price level, $ 33, is a good stop loss; right here, investors may stop expecting the price to rise and start closing their positions.
disavowal
Any provision contained in this document is based on the particular opinion of the authors. This analysis should not be treated as a trading advice. RoboMarkets can not be held responsible for the results of trading resulting from the negotiation recommendations and reviews contained in this document.
