General Motor Company (GM) had a massive rally off the July lows and now a trade may be setting up.  For reference, the stock remains well off its late 2010 IPO price of $33 despite recent strength.

In case you are into news-flow, both strong vehicle sales as well as statements by the U.S. government to sell its remaining stake in the company by 2014 has helped the stock price of General Motor Company (GM) rocket higher.

The strong rally since July has brought the stock price to the area between the 50% and 61.80% Fibonacci retracement of the entire move from the 2011 highs down to the July 2012 lows.  From a ‘bigger picture’ point of view, this is pertinent to note and makes me take notice as it is the first more significant resistance level coming into play  since the July lows.

To put the recent rally in a little more context, let’s look at a closer-up chart;

Since the low on July 25th General Motor Company (GM) has rallied just about 60%, or about 10 points in five months.  We have all seen stocks display even more exuberance than is the case here, but what’s more noteworthy is the vertical leap since December 21.  While the broader market (S&P 500) too is higher since then, General Motor Company (GM) rallied 10% in 8 trading sessions, turning the slope of the stock from steep to vertical.  Consolidation is near!

Although somewhat useless to point out in vertical charts such as General Motor Company (GM) (because overbought conditions can remain longer than most traders’ patience), I will mention the obvious overbought condition of the momentum oscillators.

While I am not one to jump into a trade unless I get a clear price signal (usually in the form of a strong candlestick signal), the vertical leap presently displayed on the chart of General Motor Company (GM) may already be good enough for the more aggressive trader to initiate a partial short position.  Nonetheless, a more conservative and higher probability approach (which I prefer) will be to wait for a one day price consolidation (lower) to finish before leaning to the short side of the stock for a trade.  I am merely looking for price consolidation, hence a 5% – 7% downside move will be enough for me to get back out of this short-side try.

Option players (call sellers) too could take part in a potential price consolidation trade here, although I would be remiss not to point out that implied volatility in GM’s options is again at the low-end of its range (see lower part of chart).  The all too often hyped-up call selling strategy (against stock) often is not as lucrative when considering the low premium being sold, not to mention the payoff diagram, which is the same as that of a short put.

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