Sink or Swim Time for General Electric (GE) - Investopedia

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Analysts debated General Electric Company's (GE) ability to survive well before the COVID-19 pandemic swept across the globe in the first quarter. The crisis brought the fallen giant's recovery plan to a crashing halt, prompting executives to warn about a sequential decline in second quarter 2020 financial results, scheduled for Wednesday release. JPMorgan's Stephen Tulsa summed up the catastrophe, noting that the first quarter was bad but that he couldn't "really find words for how bad Q2 will be."

Key Takeaways

• General Electric warned about a sequential decline in second quarter 2020 earnings and revenue.
• Accumulation readings have dropped to multi-decade lows.
• Wall Street remains surprisingly upbeat about the long-term outlook.

Earnings consensus now stands at a loss of $0.09 per share on $17.27 billion in revenue, better than three months ago due to reopening efforts around the world. Even so, GE has been forced to permanently cut 25% of the Aviation division workforce due to major headwinds in commercial air travel. Surprisingly, key investors that include Nelson Peltz and Raymond Dalio have opened new positions in the quarter, shedding rays of light on an otherwise dismal scenario.

Wall Street sentiment has also improved in recent months, lifting GE to a "Moderate Buy" rating based upon five "Buy" and six "Hold" recommendations. No analysts are advising shareholders to sell positions at this time. Price targets currently range from a low of $5 to a Street-high $11, while the stock is trading less than $2 below the median $8.22 target. This placement suggests that the company is fairly priced at this time but could gain ground after an upside surprise.

Accumulation/distribution is a cumulative indicator that uses volume and price to assess whether a stock is being accumulated or distributed. The accumulation/distribution measure seeks to identify divergences between the stock price and volume flow. This provides insight into how strong a trend is.

General Electric Long-Term Chart (2000 – 2020)

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The stock posted an all-time high at $58.41 in 2000 after a decade-long uptrend, driven by the fall of communism. It sold off when the internet bubble burst, finding support near $20 in 2002, and recouped about half of those losses into the October 2007 high at $40.53. An aggressive decline reached 2002 support in October 2008, triggering an immediate breakdown and death spiral that ended at a 17-year low in March 2009.

Bulls took control into the new decade, posting steady gains into 2016, when the rally ended in the low $30s. GE stock broke down from a triple top in 2017, entering a historic downtrend that paused at the end of 2018 within a point of 2009 support. The subsequent uptick posted a 15-month high in February 2020, giving way to a vertical plunge that undercut the 2009 low in May before ending at a 28-year low. Long-term price action has now completed an inverse cup and handle pattern that increases the odds for a major breakdown.

The triple top is a type of chart pattern used in technical analysis to predict the reversal in the movement of an asset's price. Consisting of three peaks, a triple top signals that the asset may no longer be rallying and that lower prices may be on the way.

General Electric Short-Term Chart (2018 – 2020)

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The March bounce failed after reaching $8.50, yielding a pullback and lower May low. A second buying spike failed at the same peak, carving the next leg in a rectangular pattern that could determine the stock's long-term fate. Specifically, a third trip down to $6.00 or so could trigger a breakdown that also violates 11-year support around $5.50. Ominously, that would establish a downside target at zero.

The on-balance volume (OBV) accumulation-distribution indicator warns battered shareholders that "lower" is still the path of least resistance. OBV broke support at the 2009 low after a 15-month test and has now dropped to a level not seen for three decades. Gravity could easily take control in this scenario, slicing through the 2009 and 2020 lows. However, timing on long-term patterns is extremely difficult, telling sidelined investors to watch for a third failure at horizontal resistance if earnings trigger a "buy-the-news" reaction.

The Bottom Line

General Electric accumulation readings have dropped to multi-decade lows, predicting that price will soon follow.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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