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Has General Electric Finally Found A Capitulation Bottom?

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Has General Electric Finally Found A Capitulation Bottom?

Yet another earnings miss and guidance cut and the threat of a potential dividend reduction may have given General Electric Company (NYSE: GE) traders exactly what they’ve been waiting for: rock bottom.

GE stock tumbled to multi-year lows Friday morning, dropping as low as $22.10 on major volume. However, shares quickly bounced off of that level and were trading back above $23.00 in mid-day trading.

GE bulls are hoping the bad news and big dip represent a phenomenon known as capitulation, which often occurs at the end of a long-term trend.

Capitulation occurs when investors give up on holding a stock and simply cut their losses by selling at market price and dumping their shares all at once. Capitulation is typically indicated in a stock chart by a large move on large volume that only lasts for a short amount of time.

Once the last bit of potential sellers dump their stock, there are no more sellers remaining, and only buyers remain to potentially begin a new bullish trend.

GE has given no indication a dividend cut is imminent, but capitulation often occurs following dividend cuts.

A 2016 study by the Conservative Income Investor found that stocks average a 31-percent decline in the nine months leading up to a dividend cut. Following the dividend cut, these stocks often demonstrate another large drop on high volume, which represents the capitulation point. However, once the selling is exhausted, the study found these stocks average an 18-percent gain in the years that followed the cut.

For now, GE traders will be watching Friday’s low of $22.10 for signs that it could be the bottom for GE stock. GE will need to follow through on Monday’s bounce and rally above September’s high of $25.21 to show real evidence it has bottomed.

Joel Elconin contributed to this story.

Related Link: 7 Technical Levels Discussed On Friday's PreMarket Prep

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Image Credit: Bubba73 at English Wikipedia [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons

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