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General Electric shares tank on alleged $38 billion fraud. More to go?

August 20, 2019 11:33

Since General Electric formed in 1892, the company has been a leader in American innovation. To most people's surprise, it was GE scientists and engineers that invented, or improved, everything from light bulbs to commercial jet engines and refrigerators to nuclear power plants. So, to many, recent accusations by Harry Markopolos - the forensic accountant who warned regulators of Bernie Madoff's Ponzi scheme - of the company covering up $38 billion comes at a huge shock which has already led to some very unique trading opportunities.

Trading General Electric Shares CFDs

In this article, we discuss the background behind the alleged $38 billion fraud, how investors have reacted to it and the possible trading opportunities around - what could be - a historic point for General Electric. Let's get started!

General Electric's alleged $38 billion fraud explained

On Thursday 15 August, Harry Markopolos, the financial investigator who first warned about Bernie Madoff's $65 billion Ponzi scheme, released a 175-page report accusing General Electric of hiding a whopping $38.1 billion worth of losses. The report also details how the fraud amounts to over 40% of GE's market capitalisation - making it far more larger and serious than the Enron or WorldCom accounting frauds.

The shares collapsed over 15% following news of the report and the stock ended down 11% which is GE's worst one-day fall in 11 years. The report details that $29 billion was hiding in long-term care losses and Markopolos publicly stated on CNBC that the company is heading for bankruptcy.

General Electric responded by calling the report "meritless, misguided and self-serving speculation". CEO Lawrence Culp also accused Markopolos of "false statements of fact", explaining that he had not checked his facts with GE before publishing. Culp also highlighted that Markopolos released the report to a unnamed hedge fund and that he has publicly stated he will be compensated on any price movement in the stock - suggesting that he is financially motivated to generate short-selling in the stock.

While some analysts have dismissed the report, some have long been concerned about GE's accounting procedures. In fact, GE has now had to disclose that their accounting procedures are being investigated by the Securities and Exchange Commission and the Department of Justice.

How to Trade General Electric (GE)

The recent accusations of alleged fraud at GE come at a very tough time for the company whose share price has been under pressure for more than a decade due to:

  • Declining market value
  • Poor acquisitions
  • Corporate turmoil
  • The 2008 financial crisis

These events have GE's share price go from an all-time high of $58.15 in August 2000, down 90% to just $5.87 in March 2009, to close at just $8 on the day the alleged fraud report was released. While there has been some recovery in its share price at different points in the last decade, the long-term price chart of GE's share price shows a company that is under pressure:

Source: Admiral Markets MetaTrader 5, GE, Monthly - Data range: from April 1, 2007, to Aug 19, 2019, accessed on Aug 19, 2019, at 11:47 am BST. - Please note: Past performance is not a reliable indicator of future results.

Fortunately, with Admiral Markets you can speculate on the price direction of GE's share price by using a CFD (Contract for Difference). One of the benefits of this product is the fact you can go long or short on the market.

One area that traders will now be focusing on is the all-time low price level of $5.87 made in March 2009, as the blue horizontal line shows in the price chart below:

Source: Admiral Markets MetaTrader 5, GE, Monthly - Data range: from April 1, 2007, to Aug 19, 2019, accessed on Aug 19, 2019, at 11:47 am BST. - Please note: Past performance is not a reliable indicator of future results.

As this price level is historic, buyers may wait for this price level to be reached first before deciding whether or not to invest in the company. This means that sellers could stay in control of the market until that price level. Traders will typically go to the lower timeframes to further confirm their trend bias as well as search for possible entry opportunities.

For example, let's look at the 4-hour price chart of GE's stock price:

Source: Admiral Markets MetaTrader 5, GE, H4 - Data range: from November 20, 2018, to Aug 19, 2019, accessed on Aug 19, 2019, at 12:04 pm BST. - Please note: Past performance is not a reliable indicator of future results.

In the 4-hour price chart above, the red support line broke before the release of the report alleging fraud. It seemed some sellers were already positioning themselves for a move lower. If sellers fail to push the market lower and allow buyers to step in and then break back above the red resistance line then it would indicate buyers are in near-term control.

However, as the price is below the red line sellers are in control and could stay in control until the blue horizontal line. Support and resistance lines help traders identify who is control of the market but can also help with timing entries and exits. Traders will often use price action patterns and technical indicators for further help on timing entries and exits.

Conclusion

While the share price of General Electric has been declining for some time, it seems like the company is entering a critical phase in its journey. The alleged $38 billion fraud may weigh on the stock for some time. If found to be accurate more downside could be likely. But, if found to be false there may be a relief rally in the stock. Either way, it's a very interesting time for GE. How will you be trading it?

One way is with MetaTrader 5 as you can trade on multiple asset classes, and access superior charting capabilities, free real-time market data & analysis, the best trading widgets available, and much more! To download MetaTrader 5 now, click the banner below and receive it for FREE!

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4.The Analysis is prepared by an independent analyst Jitan Solanki, Freelance Contributor (hereinafter "Author") based on personal estimations.

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