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Goldman Sachs, Financial Stocks Sector XLF ETF Analysis

Companies / Banking Stocks Apr 19, 2010 - 12:44 PM GMT

By: Mike_Paulenoff

Companies

Best Financial Markets Analysis ArticleThis week we look at a few of the financials to analyze the chart structures after Friday's major downside reversal in Goldman Sachs Group (GS) and other related financials.


Apart from whether Goldman is innocent or guilty of the charges levied by the SEC, the indelible impression left by Friday afternoon's trading is that GS stock ended something on the upside and started what could be a fairly dramatic decline.

Looking at the weekly chart going back to 2003, you can see the peak at 250 and change in Oct '07 with the bear market led by the financials. GS got down to 47.41 in Nov '08, and since then has been able to recover about two-thirds of its losses until Friday. On Friday Goldman hit a new high for the post Jan-Feb lows at 186.41 and plunged after the midday allegations by the SEC were announced.

The stock went from 186.41 to 155.55, and although this is a weekly chart and this is a weekly spike, this entire move occurred on Friday. This is a major, massive, one-day reversal for Goldman.

So, as far as I'm concerned, the rally from Jan to April is complete. GS broke key support along the Jan-April trendline at about 169 1/2-170 and continued lower and closed below its near-term up trendline.

What next?

If we choose to take most of the points along the line from Nov '08 to the present, then Goldman broke its trendline at about 263-264 on Friday. If we take a more traditional approach by just connecting the lows, taking the Nov '08 low and Jan '09 low, that trendline comes in at 140 1/2 or so -- and Goldman has further to go before it does more significant technical damage.

My work shows Goldman in a double top from Oct '09 at 193.60 and April 2010 at 186.41. The pressure of this double top has sent Goldman down so far and will test the pullback low from Jan at 147.81. If prices do not hold the Jan low, and if Goldman breaks and sustains below 147.81, the measured objective is to about 110 to 100 thereafter.

In short, GS has rally potential to 168-170 maximum, and support on a downside continuation to 153 to 147.80. A break of 147.80, and I would be looking for a $40 decline in Goldman.

The XLF and Other Key Financial Stocks

While we're talking about the financial sector let's go over and take a look at the Financial Select Sector ETF (XLF). It, too, had a weekly downside reversal, as the upmove last week peaked at 17.12 and closed at 16.36, suggesting that the XLF is starting a correction.

Unlike Goldman, however, the XLF is in generally healthy condition. The trendline from March '09 through Feb 2010 crosses the price axis at roughly $15. So, it looks like that if the XLF has more downside to go, with a test $15 ahead. If this trendline breaks, then I think it will follow the path of Goldman and test its Jan pullback lows at 13.51.

The Bank of America (BAC) chart resembles more the XLF than it does Goldman Sachs. But it, too, had a downside weekly reversal (we're looking at weekly charts because Goldman had such a dramatic downside reversal on a weekly basis). The peak for the entire move off the Jan '09 high occurred last week on Friday morning, after earnings, at 19.86, and it closed the week at 18.41. To test the trendline from Jan '09, BAC will have to press toward 16.20, which is exactly what I think will happen.

Citigroup (C) has a quite different chart pattern than those we've reviewed thus far, as its most recent high did not exceed its prior high. Citigroup basically had its peak at around 5.43 in August of '09 and a secondary high last week at 5.07, but its low came not this past week but the week prior, when it closed at 4.55 (it closed this week at 4.56). So, from a purely technical perspective, Citigroup did not have a weekly reversal. Could it and should it continue lower? My suspicion, based on the chart structure is yes, and it should test this trendline at 4.17-4.20. Should it hold, chances are Citigroup will be a buy. If it breaks then Citigroup will test its major trendline at 3.44.

Looking at Morgan Stanley (MS), it had a significant reversal this past week and it looks like the weakest of the chart structures we've examined so far. In fact, if Morgan Stanley resumes weakness early this next week and breaks 28.67, the low from this past week, it will break the trendline off the Oct '08 lows and could be in a world of trouble technically.

MS's support line cuts across the price axes at roughly 26 1/2, whereas the Jan or Feb pullback low is 26.50. So, 26 1/2 to 26.15 is critical support, and if MS does not hold the critical support line, you can make the case that it has a pretty significant head and shoulders-type of pattern here that will put very intense pressure on the $26-$25 area and open the flood gates to a significant decline thereafter.

The strongest chart of all the financials is probably JP Morgan Chase (JPM). However, it, too, was not immune to last week's down move in reaction to Goldman Sachs. It had a downside weekly reversal as well, closing at 45.55, after making multi-month and multi-year highs earlier in the week at 48.20. Unless JPM can claw its way back above 48.20, more likely than not it will continue lower and test the trendline that goes back over a year and comes in at 41.30 roughly this week. A break of 41.30 will take JP Morgan to retest its February low at 37.02.

So, what we can say in general is that we had weekly reversals in all the financials this past week. It sets the stage for downside continuation or, alternatively, a rally, which if it fails to take out the prior highs will then roll over into a more dramatic decline in continuation of the weekly downside reversal.

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By Mike Paulenoff

Mike Paulenoff is author of MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies, Treasuries, and specific industries and international regions.

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