Wall Street icon Goldman Sachs Group Inc (GS) got downgraded to “sell” by a Citigroup analyst in Tuesday’s pre-market, catching the attention of market players because the majority of top-tier houses have issued “buy” ratings since the presidential election. Even so, long and short-term price patterns offer logical technical support for the bearish call, telling shareholders to tighten stops or take partial profits.
The company reports fourth-quarter earnings next week, offering an opportunity to separate hype from reality but it will take months for the bullish thesis in place since November to take root in the financial community. Specifically, banks should benefit from widening yield spreads in a Fed rate tightening cycle while Wall Street underwriting activity is expected to grow from current depressed levels due to higher economic growth, triggered by tax reform.
GS Long-term Chart (1999-2017)
The company came public in the 60s in May 1999 and gained ground into September 2000, when it topped out at $133 and rolled over in a decline that posted a long series of volatile selling waves into the October 2002 low at $58.57. It tested the low five months later and turned higher in a multi-wave uptrend that gathered strength through the mid-decade bull market. Volatility increased sharply once again in 2007 after the stock pushed above $200, triggering a series of broad swings in line with growing cross-currents in real estate and derivative pricing.
The stock plunged during the 2008 economic collapse but held up better than its economically-strapped rivals who came close to bankruptcy. Selling pressure ended in November after it tagged an all-time low at $47.41, with the subsequent recovery wave stalling near the .618 Fibonacci selloff retracement level in October 2009. That peak marked the highest high for the next six years, ahead of a downtrend that posted a higher low near 90 in October 2011.
It tested the low in 2012 and turned sharply higher, finally reaching the 2009 high in the second half of 2014. A breakout into 2015 got sold aggressively, triggering a correction into 2016 that posted the second higher low since 2009. That bullish technical event set the stage for a post-election rally that added 75-points into mid-December. The stock has been grinding sideways since that time in a holding pattern that could last until Jan. 18 earnings.
The torrid rally has now reached within 10-points of major resistance at the 2007 high near $250 while the monthly Stochastics oscillator has lifted into the steepest overbought reading since 2010. This placement generates an automatic sell signal that expects an intermediate reversal and pullback to consolidate recent gains, possibly contributing to Citigroup’s bearish call.
GS Short-Term Chart (2014-2017)
The post-election rally started with a gap above 180 that generated a vertical impulse into resistance at the June 2015 high at 218. It paused for just two weeks before heading into a second parabolic thrust that’s driven the price up to 2007 resistance (black line). While the long-term outlook expects even higher prices this year, the stock is now stuffed with a healthy supply of weak-handed long positions that haven’t been tested, generating ideal conditions for a downdraft.
On Balance Volume (OBV) supports the breakout with a solid thrust to a new high while the price has held up very well since topping out nearly one month ago. This may foretell a final buying spike above $250 that gathers a last set of buyers before the intermediate correction gets underway. In any case, it’s nearly impossible to trust a rally above the 2007 high with no base of support under the market until the 170 level (red line).
The Bottom Line
Goldman Sachs has nearly completed a 100% retracement into the 2007 bull market top. This price action raises an automatic sell signal that expects an intermediate correction lasting at least several months before a sustained breakout to new highs.
<Disclosure: the author held no positions in stocks mentioned above at the time of publication.>