April 19, 2010

Goldman Sachs vs Major Indices

(Click to enlarge the graphic).

Goldman made what many have received as "unwelcome" news last week, but were there technical warnings ahead of the move?

The three weekly charts above plot an overlay (left to right) of Goldman Sachs (GS in black bars) against the SPDR S&P 500 ETF (SPY in purple line on close), the KBW Bank Index ($BKX in orange line on close), and the Financial Select Sector SPDR ETF (XLF in green line on close). Dates of interest are denoted using red vertical dashed lines, and prices of interested are plotted in red (for resistance) and blue (for support) horizontal dashed lines. Finally, Fibonacci retracement grid (purple) and a ratio plot (black line) are plotted in the indicator area of each chart.

Among the many interesting aspects of this chart is the manner with which Goldman "roared off its lows" in late 08 well before each of the other indices. While those broader markets fell further into Spring 09, Goldman (much like other international markets themselves) rebounded far earlier. The resulting reversal in the ratio line broke a downtrend (not plotted) setting the tone for what has proven to be an impressive return to near previous highs.

When did it all change? Q3 of CY 09 seems to tell the tale. Though Goldman rose greater in comparison to the broader market (see the higher high in Goldman over Jul 09 to Oct 09 present on each chart), the security itself lagged behind each of the two important financial benchmarks above (see the second and third charts, left to right). This divergence, per se, at least served as a cautionary note as the security fell off in Oct 09. Looking closer to present date trading, while the rise in Goldman impressed several weeks back, this came on the back of at least an equal, if not stronger move, in the three benchmarks above - the result of which can be seen in the ratio line itself.

What's the road ahead? Goldman appears to be set in a trading range for the moment between $147 and $165. These prices were derived from a Fibonacci retracement grid emanating from the last strong thrust in May 09. Notice the security "bounced" near the 38% and 62% retracement values despite the two most recent sell offs, further enhancing the credibility of the measurement. These values form a channel wherein we're likely to see Goldman range trade until direction can be attained. Should the market fall below $147, then $135 is in play for Goldman to the downside.

What's the best way to play this trade? A range trading approach could be used in the currently defined channel, but is not likely to last more than a few weeks at best. Goldman has not demonstrated a "range trading" nature for more than a month in recent memory, so this is a short-term approach. A more tactical "break out" trade might prove more favorable, with a downward bias the "fundamental" flavor of the day.

Technically however, longs should wait for a break above $165, but then wait for prices to fall back to that level as the market matures forward; shorts should likewise wait for a break out using a fall below $147 as a sign of weakness, yet wait for a recovery to that level before entering a short. While note plotted, a tighter channel (to likely be formed this week between $155 and $160) could serve as logical stop loss values depending on one's bias.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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