Investors dumped shares of U.S. automakers in the first half of 2011, worried that a slowing economy, a stubborn unemployment rate and elevated gas prices will take a heavy toll on annual sales. Indeed, monthly numbers are showing signs of rapid deceleration, with May seeing the worst results since November. While sales should pick up in the second half of the year, profitable sector exposure will require a strong stomach and careful timing.

The auto industry's challenges this year go beyond basic economics and high fuel costs. For starters,

Ford

(F) - Get Report

and

General Motors

(GM) - Get Report

have already recovered the steep losses they incurred during the last bear market. Ford did it the old fashioned way, taking market share from its rivals and attracting new investment in a rapid uptrend that reached a seven-year high in January.

General Motors relieved itself of toxic shares through a bankruptcy filing and the issuance of new stock last November. Its initial public offering was greeted with an unhealthy dose of enthusiasm given the company's multi-decade history of weak performance. Not surprisingly, the uptrend ended just six weeks after the company went public, with the stock now trading well below the IPO price.

Both auto giants missed a historic opportunity after the Japanese earthquake damaged the assembly plants and supply lines of its competitors, especially

Toyota

(TM) - Get Report

, forcing production cuts that are still in force. Unfortunately, Libyan unrest was gathering steam at the same time, lifting crude oil and unleaded gasoline prices to multiyear highs.

It's interesting to note that automakers failed to participate in the last leg of the broad equity rally, with General Motors topping out on Jan. 10, while Ford ended its long uptrend just three days later. Sellers then took firm control on Jan. 27 when Ford missed earnings estimates by $0.18, catching analysts by surprise and forcing a series of downgrades.

Despite the sector decline, many investors still want long-term exposure to Ford and General Motors because they're American icons that should benefit greatly from the next wave of the economic recovery. In that regard, let's see if the current technical patterns offer actionable data about the starting date of the next automaker rally.

Ford (F) - Weekly Source: eSignal

Ford hit a major high at $17.43 in January 2004 and entered a long downtrend that finally ended at $1.01 in late 2008. It recovered in a V-shaped rally that finally reached the old high in January of this year. The stock pushed over that resistance level (blue line) for 16 price bars and then plummeted in a steady decline that's still in force six months later.

The downtrend has now retraced about 30% of the 2009-10 bull market advance. It broke support at the 50-week moving average in late May and is now trading under that pivotal price level for the first time since March 2009. It looks like the 38% retracement, just above $12, will mark the next downside target for this decline.

It's natural for a stock to enter an intermediate decline following a major recovery to a multiyear high, like the 2004 peak. The 38% and 50% rally retracements will often contain the downside and set up supportive conditions for an eventual breakout over the big resistance level. Given these expectations, Ford remains vulnerable to a final downdraft into round number support at $10, perhaps as early as July or August.

General Motors (GM) - Daily Source: eSignal

The new General Motors came public at $35 on Nov. 18, creating an instant buzz. It made little progress on its first trading day and then dropped into a six-week rectangle pattern, with resistance at the IPO price and support at $33. The stock broke out on Dec. 28, surged higher for eight sessions and then topped out at $39.48, which still marks the post-offering high.

A slow pullback gathered downside steam in February, cutting through natural support at the IPO price (blue line) and hitting a new low just two sessions later. The pattern since that time shows a series of lower lows, with strong resistance developing at $33, which marked the bottom of the original rectangle pattern (red line). Secondary resistance lies at the 50-day exponential moving average, with the stock failing three attempts to establish new support at that level.

The stock has now rallied back to the moving average for the fourth time and is also trading above the April low (green line). This resilient short-term performance points to incremental progress that could mark the first phase in a long-term bottoming process. It's still too early to risk capital on this stock. Instead, wait for the recovery to push back over the red line and then jump on board.

At the time of publication, Farley had no holdings in the stocks mentioned.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

The Daily Swing Trade

, a premium product from TheStreet.com that outlines his charts and analysis. Farley has also been featured in

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. He has written two books:

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and

The Master Swing Trader Toolkit: The Market Survival Guide

, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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