The Goldman Sachs Group, Inc. (GS) reports second quarter earnings on July 18, with market watchers lowering expectations following sector-wide declines in reaction to the first wave of commercial banking results last week. However, the financial icon could pull a rabbit out of its enormous hat and lift the stock back to 10-year resistance, generating a powerful breakout that reinstates the Wall Street giant's former leadership status.
The stock topped out in March following a strong post-election rally driven by optimism that business under the Trump administration would generate higher profits. Slow economic growth and a surprisingly cautious Fed have brought that bullish thesis into doubt, triggering several months of profit taking, but a well-organized basing pattern at long-term support suggests that selling pressure is nearing its end, allowing Goldman to resume its upward trajectory. (See also: Goldman, Citigroup Face Rocky Earnings Season.)
GS Long-Term Chart (1999 – 2017)
The stock came public at $68 in May 1999, right at the peak of the dotcom bubble, and entered an immediate decline that bottomed out at $55.19 a few months later. It then joined the broad market universe in the last phase of the parabolic rise into the new millennium, topping out at $128 in March 2000. Intense volatility then set into motion, triggering a vertical dive into the upper $60s, followed by a V-shaped recovery that posted a new high at $133.63 in September.
That peak marked the highest high in the following five years, giving way to a choppy decline that bottomed out in 2002 just above the prior decade's low. The stock emerged as a sector leader during the mid-decade bull market, reaching the prior high in 2006, ahead of a powerful breakout that nearly doubled its price into the October 2007 top. The subsequent decline picked up steam in the second half of 2008, accelerating into a historic crash that forced many competitors into bankruptcy. (For more, see: How Goldman Sachs Makes Its Money.)
Selling pressured ended at $47.41 in November while the company's balance sheet held intact due to a series of profitable macro-trades, giving way to a bounce that stalled in the $190s in 2010. That level marked heavy resistance until the November 2016 breakout generated a powerful advance that reached the 2007 high in February 2017. The stock price topped out a few weeks later and rolled over in a steady downtick that reached long-term support in April.
GS Short-Term Chart (2015 – 2017)
A long-term uptrend fizzled out just above the 2010 high in 2015, giving way to a broad decline that found support just below $140 in February 2016. A June test at that level found willing buyers, generating the last leg of a double bottom reversal, ahead of a strong October rally that accelerated through multi-year resistance one month later. That uptick ran out of steam just five points above the 2000 high in the first quarter of 2017.
The stock has carved a rounded basing pattern at the 200-day exponential moving average (EMA) in the past three months, generating well-defined resistance above $230. A breakout above that level, perhaps in reaction to a strong earnings report, could ignite a recovery wave that reaches the prior high. That bullish price action would also complete a multi-decade cup and handle pattern that generates an outstanding long-term measured move target above $450. (See also: 26 Goldman Sachs Alumni Who Run the World.)
On-balance volume (OBV) topped out in the middle of 2015 and entered an aggressive distribution wave that ended right after the 2016 Brexit referendum. Buying pressure into 2017 lifted the indicator to the highest high since the 2008 crash, while the pullback into the third quarter has elicited routine profit taking that tells us the long-term uptrend remains fully intact. This bodes well for an eventual breakout that could surprise many market watchers.
The Bottom Line
Goldman Sachs stock entered an intermediate correction after reversing at 17-year resistance in March 2017. Selling pressure has eased at 200-day EMA support while a monthly stochastics sell cycle nears the oversold level. Taken together, it is likely that support above $200 will hold in coming weeks and give way to a breakout run above $300. (For additional reading, check out: Goldman Sachs: 5 Trends to Watch in 2Q Earnings.)
<Disclosure: The author held no positions in aforementioned stocks at the time of publication.>