General Electric Edition: Do Not Argue With Sellers

General Electric Edition: Do Not Argue With Sellers – Celebrate With Buyers

Sep 26, 2018Jeremy ParkinsonFinance0

General Electric (GE) dropped 4.0% for a fourth straight day of high volume selling. At $11.27/share GE sits at a stomach-churning 9-year low.

General Electric (GE) still can’t find a bottom. The last three trading days have delivered fresh 9-year closing lows.

Source: TradingView

GE’s early June expulsion from the Dow Jones Industrial Index seemed like such natural ignition for a bottom that even CNBC’s Jim Cramer got off the fence to declare the stock a buy. At the time I proposed a lower risk method of playing a potential bottom using call options. The call option configuration certainly helped ease the pain of the recent 9-year lows. Still, with selling accelerating, the temptation to consider the conditions for a bottom is too great to resist. Sure enough, Guy Adami on Fast Money offered his keys for determining whether GE (or any stock) has indeed finally reached bottom:

A new 52-week low on heavy [trading] volume: this action can indicate a wash-out of sellers.

Management is up-front and addressing the problems with the business: hope remains the company figure things out.

The company remains in a viable industry: the business and economic environment still gives the company time to turn things around.

If GE’s drop makes you want to buy the dip, @GuyAdami has tips on when to catch a falling knife. $GE pic.twitter.com/a8mvRTdH7p

— CNBC’s Fast Money (@CNBCFastMoney) September 25, 2018

I like Adami’s points. However, the title “how to catch a falling knife” is telling. Traders and investors should not actually reach out to catch a falling knife. Instead, they should step in when the risk of catching a knife is sufficiently low to make the risk worthwhile. In other words, I prefer to wait for “confirmation” that the falling knife has finished falling; I want the ground to catch the knife, not me.

Two years ago, I described this confirmation process in a piece titled “Do Not Argue With Sellers – Celebrate With Buyers.” When sellers have firm control of a stock, I want to wait for some sign of buying – like a trading day with a gain. A stronger confirmation occurs after buyers manage to establish control of the trading with a complete reversal of the most concentrated part of the sell-off. My only rare exception to the confirmation rule occurs when I have a strong conviction from some data or analysis that puts me in accumulation mode.