ChartWatchCentral Stock Picks

Electrical Storm

Date: April 11, 2003
Company: General Electric
Ticker: GE
Price: $27.36
Target Price(s): Initially $25.50, then possibly $23.80 and $21.9
Opinion: Bearish
Comments:On April 11th, General Electric (GE) reported first quarter earnings in-line with Wall Street's expectations. However, since GE expects their second-quarter bottom line to decline as much as 15 percent, a miraculous rebound would have to occur in the second half of this year, if the full-year 2003 profit goal is to be met.

Over the past two months, shares of General Electric (GE) charged ahead by 30%. And as GE challenges significant overhead resistance between $28 and $29, we see more evidence of a top than a bottom.

For starters, a head and shoulders top appears to have been forming since mid-March, with the average trading volume steadily declining in recent weeks. (chart #1) To make matters worse, the stochastic oscillator failed to confirm the April 7th new high, and is just starting to back off an extremely overbought level on a weekly basis. (chart #3)

There is considerable overhead resistance in a zone spanning between $28 and $31. Potential support levels are situated at $26.32, $25.45, $23.80 and $21.95.

Keep a close eye on GE's price action and volume over the next week or two, because if a head and shoulders top is forming, it might be possible to make some money trading the right shoulder and eventual breakdown. After an initial decline below $26, there could be one last rally to as high as $28 before the shares fall to the low $20's.

To profit from this bearish formation, we suggest the June 30 put (Symbol: GERF) at $3.20. And if you want to give the trade more time, consider the September 30 put (Symbol: GEUF) at $3.80. Both options could very easily double if our downside objective is met.


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