The Chart du Jour
Back in early June, we posted a small contest on Sandspring.com to identify a prior no-name chart pattern. After a flurry of answers, we ended up with two winners who both correctly guessed the 1936-37 Dow Jones. For subscribers, we also compared this chart pattern to one then being sported by a major Dow stock -- General Electric.
With General Electric having plunged to a $28.50 low last Friday, we thought we'd now let non-subscribers see what we had originally prognosticated when GE was above $50.
No, our espoused $25.69 target has yet to be reached, but having recently come reasonably close to it, we'd also like to share our buest guess on G.E. from here.
First, it is important to look back at the 1936-37 Dow chart on our original analysis. See how on its decline, the market makes three small thrusts to its ultimate low? These are divided by two minor reaction rally attempts.
Within a broader market that should now slop and chop for a considerable period of time within a messy range, G.E. likely just experienced its first "bounce period." Another thrust lower, small bounce, and then a final thrust down should follow. This could all take several months -- perhaps lasting all the way until February 2002. With time, our original $25.69 may still be reached, or it may not.
Our point is not to suggest shorting GE here as a "position trade" anymore. It's a bit late for that given how close in dollar terms our ultimate price target became last week. With over 80% of our previously anticipated decline achieved when this stock touched $28.50, those still short GE from far higher levels might even want to use dips to book out profits and go on to other situations. But we certainly wouldn't establish a buy-and-hold long position in GE either -- at least not yet. Those final two thrusts down will likely still take quite a bit of time to grind through, even if the absolute magnitude of the decline will not be that large.
Instead, we'd look at GE to be a range trading situation with a mild negative bias -- good for the "bop and weave" day-traders among us.
For those that always want a bit of absolute protection, we also think the January 30 puts priced at $1.35 might be interesting to purchase on the current bounce and then actively trade stock against over time -- buying GE on significant dips, knowing the put is there to always protect from a real crash; and then reselling the stock on rallies. Or maybe one should just consider buying these low-premium puts here, with a view to kicking them out on a retest of the recent low (which should likely come at some point). If GE never goes down below $30 again (to allow for a significant counter-trade stock purchase or option re-sell), an investor following this advice would only be out the $1.35 premium -- certainly not the end of the world.
This is just a limited risk suggestion to potentially catch the very tail end of this move -- if we haven't completely seen it already.
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