GE's Chart Preaches Patience
General Electric's (GE) - Get Report earnings miss last Friday came as a shock to Wall Street. As most folks will tell you it was highly unusual for GE to miss earnings, let alone by such a wide margin and especially after having reaffirmed guidance not too long ago.
The question of whether or not GE is a buy now keeps coming up. The thought process is, well, it's GE and it was only their financial services business. I'll leave that to the fundamental folks. I am the author of
, so I thought I'd take a look at the chart and examine not only GE's chart but also take a look at two other times key companies missed earnings or made some sort of announcement that surprised the street.
GE's volume was extraordinary, and the stock failed to make a lower low. Those are usually taken as positives on a chart in such that the high volume means a cleanout is taking place and the failure to breach a previous low is an apparent retest.
The main difference in the chart of GE and the charts I present below is that GE's prior low was quite recent and not many months prior. The first chart I'd like to show is that of
Cisco
(CSCO) - Get Report
from the early 2000s. I do not recall the exact circumstances of the news but in December 2000 Cisco's CEO John Chambers surprised the street with some poor news. The market (and Cisco!) had already been falling for several months at that point so the stock's reaction was not good, but in reality was relatively mild. The price fell from approximately $42 to $35, which on a percentage basis was actually more than GE's fall on Friday (yet on the chart you really must squint to see it!).
Notice the volume then was quite high and that low from the previous year seemed to hold. Now let's move forward to see what transpired on Cisco's chart after that.
I've boxed it on the chart so you can see the action that took place thereafter. It spent six weeks attempting to form a bottom, only to give way to a much longer much more extensive decline. And when their earnings came in February once again the Street was disappointed and you can see the massive rise in volume. That gap lower did not even attempt to hold as it just kept on sliding.
Back in the early 1990s Philip Morris, which then became
Altria
(MO) - Get Report
, which has now become
Philip Morris International
(PM) - Get Report
was a very important stock. And while it had been sliding for several months already it shocked the Street when first-quarter earnings disappointed. (I am reminded that then we had been moving to no smoking buildings and were just beginning to see folks huddled outside office buildings smoking, so it should probably not have come as such a shock that MO missed, the same way we all knew GE has a financial services business that could not have avoided a hit in this environment, yet we still managed to be surprised.)
That drop was about 25% (these charts are adjusted for splits). Look at the massive volume.
In MO's case that did turn out to be the low. However, the point is to look at how long the stock spent hanging around at the lows: about six months or so. It built a base over the course of the next six months and even retested that low again in October of 1993. (It's not on the chart but you can see the stock once again revisited the lows in the middle of 1994).
In sum, high-volume declines in individual stocks often mark some sort of capitulation on the chart. That tends to be followed by some sort of rebound, which is then followed by a period of retesting. In Cisco's case that retesting was not successful as the lows eventually gave way. In MO's case a mad rush to buy it on the break was not necessary as it gave you several opportunities over the course of the next several months to buy it.
So maybe there's a quick trade to the upside later this week as GE rebounds, but for the average investor it is more likely if this was the low, and that still remains to be seen, it will be retested again. There's no need to rush.
Helene Meisler writes
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(PFE) - Get Report
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(BUD) - Get Report
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At the time of publication, Meisler had no positions in stocks mentioned, although holdings can change at any time.
Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information,
. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback;
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