Thursday, June 26, 2008

General Motors - When Stockholders Feel Like Puking

What do you get when you cross extremely high volume with an extreme gap lower move?

Well, in General Motors case, you get some very high odds that a panic low has been put into place. If we follow historical precedence of past GM stock behavior then this is exactly what has been the case in a vast majority of cases.

Today saw exactly this action and because of this historical precedence, which constitutes 80% of the technical work I do, it is a fairly safe time to enter into GM on the long side.

Now I know it will be really hard for many of you to pull the trigger on this one, for no other reason than the drubbing the stock has taken over the last 6 months and especially the last 2 weeks. However, it is exactly this "I have to be crazy" feeling we get that many times will tell us that the bloodbath is over and it is safe to go back into the water.

This play should be good for at least a 38% retrace move which translates into 10 to 12 points on the stock, with an outside chance at a 50% retrace move which translates into a 15-17 point move. With the downside being very limited at this point and the strong upside potential and a possible double on the stock price, the risk reward ratio is on our side.

There are a few ways to play this.
1. Call Options out at least 3 months and at or just out of the money.
2. Leap Call Options out at least 12 months and at the money.
3. Outright purchase of the stock.

Myself, I will be doing number 1 and number 3 and I really only anticipate a shorter holding period.


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