The point & figure chart below gives us some sense of the near-term rally objective we may expect for GE. Because of the low price of GE, a one-half point chart is used.
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The vertical drop from 15 1/2 to 10 (A) frames the horizontal trading range on the left. The last figure on the right reached by GE is 10 (B). Should the stock rally to 10 1/2, another figure would result at that level. That figure is shown in a lighter shade to indicate that the stock has not yet reached 10 1/2. However, we fill it in provisionally in order to compute the count along the 10 1/2 line.
The most conservative count at 10 1/2, including the shaded "x", is 4 x's. A count of 4 suggests a rally of two points (4 x 1/2) to a target of 12.
If we extend the count to the left, there is a longer line of 8 x's at 10 1/2. This longer count suggests a higher target of 14 (see below). Until and unless this second target of 14 is reached, we will not consider targets beyond 14 suggested by counting to the vertical wall, left of the chart.
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Point and figure charts can be very useful tools, but should not be relied on exclusively nor used mechanically. Price-volume charts are the best instruments for detecting the quality of supply and demand. P&F objectives should be considered suggestive and provisional. Target areas suggested by P&F charts are stop-look-and-listen points only, and should never be considered definitive.
We took a small, initial long position at I, then added to the position at J. Our expectation now is that the price will attack supply at 11 1/2. This is consistent with our first target of 12.
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After a strong move up from support, GE runs into supply again above 11. Our evidence is the big increase in volume and spread compression at K. We would prefer to see the price move easily on only moderate volume at this point, and the action at K puts us on notice that supply may be alive and kicking.
Volume continues high as the price edges upward. Demand is working hard to push the stock up against the weight of supply at 11. Then the stock settles into a trading range. Buyers and sellers are contending for control, and the net result over the balance of the period shown above is stalemate. The failure of the stock to meet even the first modest objective of 12 is a concern, but our position at this point is small and our risk is well-defined. Overall indications remain positive.
Our plan is to hold our position. If another favorable buying opportunity presents itself, we will increase our long position. However, we are prepared to reduce or exit our position should we conclude, on the evidence, that sellers have gained the upper hand.
Our initial position in GE was taken in two parts, the first just after the evidence of a shakeout at I and the second at J. Our approach to accumulating a position is to make adjustments based on the evidence of the tape. Shares are added only when evidence builds that strong-handed buying interests are in control. On the other hand, evidence that sellers are gaining the upper hand may cause us to reduce our position.
We want to take positions as close to strong support as possible in order to limit risk. Should support break down in a way that suggests control by sellers, we will immediately eliminate or reduce our long position to control losses. Strong support in this case is identified at points H and I, at 9 1/2 to 9 3/4.
After the action at I and J, the stock rallies to 11, where a stalemate between buyers and sellers develops. Strong hands may be mopping up residual supply at this level prior to advancing the stock, so we maintain our position. The dip to L, appears to be a normal test of support, but adds little to our evidence for the bullish case. We do nothing.
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Four periods later, the price drops on high volume, breaking minor support at L. Little in the prior action of the tape has prepared us for this development; the high volume comes out of the blue. It is likely that some bit of negative news has spooked weak-handed traders into selling. Whatever the reason for the selling, the action of the tape puts us on full alert. Support is about to be tested again.
After the flurry of selling, the tape on GE settles down to narrow trading near support. Volume tapers off quickly. Available shares around support are getting scarce fast, as evidenced by narrow spreads accompanied by the sharp drop in volume. The way the stock hugs the lows on decreasing volume and narrowing high-low spread tells us that the struggle for control is over for now. This is the quiet after battle. But who is in control?
Consider that sellers have launched a number of attacks on support around 10 over the last year. Each time, selling forces suffered attrition, as evidenced by declining volume with each attempt. The ranks of sellers are thinning as their shares are absorbed by strong hands. This action demonstrates that buyers are in firm control around support. We conclude that the stock is set up to advance.
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For months, GE has been building a base. The energy coiled up over that period is substantial. Point and figure targets now suggest that the stock is a potential double. With the stock very close to support, there is new evidence that control has moved back into strong hands. We decide to add incrementally to our position, at M.
We have now taken in all the stock we are willing to at these levels. If the stock disappoints by breaking down, we will sell quickly and take our losses. On the other hand, we are willing to add to our long position once the stock demonstrates an ability to rally beyond supply at 11.