General Motors Company (NYSE:GM) was plunging about 8% lower on Thursday after two bullish days caused the stock to rise almost 5%.
The decline on Thursday a reaction to a bear flag that General Motors had settled into on the daily chart.
The bear flag pattern is created with a steep drop lower forming the pole, which is then followed by a consolidation pattern that brings the stock higher between a channel with parallel lines or into a tightening triangle pattern.
- For bullish traders, the "trend is your friend" (until it's not) and the stock may continue to rise upwards within the following channel for a short period of time. Aggressive traders may decide to purchase the stock at the lower trendline and exit the trade at the higher trendline.
- Bearish traders will want to watch for a break down from the lower descending trendline of the flag formation, on high volume, for an entry. When a stock breaks down from a bear flag pattern, the measured move lower is equal to the length of the pole and should be added to the highest price within the flag.
A bear flag is negated when a stock closes a trading day above the upper trendline of the flag pattern or if the flag rises more than 50% up the length of the pole.
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The General Motors Chart: General Motors set itself into a bear flag between June 14 and Wednesday, with the pole formed over the first four days of that timespan and the flag created over the course of Tuesday and Wednesday. On Thursday, the pattern was recognized, which caused GM to slide lower. The measured move of the pattern is 17%, which suggests the stock could fall toward the $28 mark.
- GM is also trading in a confirmed downtrend with the most recent lower high printed on Wednesday at $34.60 and the most recent confirmed lower low formed at the $32.15 level on Monday. If GM closes the trading session near its low-of-day price, the stock will print a bearish kicker candlestick, which could indicate lower prices will come again on Friday.
- After GM prints its next lower low and prints a reversal candlestick, such as a hammer or doji candlestick, the stock is likely to bounce up to at least print its next lower high. The bounce is likely to happen over the coming days because the relative strength index (RSI) is measuring in at about 32%, indicating GM is reaching oversold conditions.
- GM has resistance above at $31.56 and $33.33 and support below at $28.72 and $27.04.
GM CEO Mary Barra. Benzinga file photo by Dustin Blitchok.
