Financials have participated nicely in the broader stock market rally off the August lows. That’s good, because I can’t stress enough the importance of the financial sector as a tell about the health of the broader stock market.
In that vein, Goldman Sachs (GS) — one of the most important financial stocks — looks good from a multimonth perspective and could offer active investors juicy opportunities on the long side.
Over the years, I have built what I call my “insta-feel watch list,” which is comprised of various indices and indicators across asset classes and quickly gives me a good idea of what the current tone of the market is. This watch list has a very prominent spot on my desk, and currently includes GS stock. The broker and banking stocks in particular have the tendency to be good leading indicators for the broader stock market, or at least provide confirmation of the strength of a move.
Looking at the chart of the KBW Bank Index (of which Goldman is a part), note the big wedging pattern that currently is in play. The steep rally off the August lows is once again pushing the index against its March diagonal resistance line and that, with momentum still rising, stands a good chance of resolving higher in coming months.
GS Stock Charts
Sliding over to the multiyear weekly chart of GS stock, we see an equity that is itching to ultimately break past horizontal resistance (blue line) around the $180 area. After cratering into the abyss in late 2008, Goldman Sachs shares staged a “V”-shaped rebound, and in 2011 and 2012 they formed a crucial higher low in the form of what also might be considered a double bottom. GS then rallied again, and by January of this year reached lateral resistance dating back to the second half of 2009, around the $180 area.
Much of the 2013 rally came on slowing momentum, as represented by the relative strength index on the lower part of the chart, but momentum has once again begun to rise since shares’ low in April. Meanwhile, GS stock has worked back to this multiyear resistance level around $180, all while having a series of higher lows supporting the stock for an eventual breakout rally.
On the daily chart, note how in June the stock broke higher out of what was a bearish formation, and that sort of bearish-to-bullish reversal ultimately led GS stock to run higher throughout the summer. The stock then pulled back to its rising 50-day simple moving average (yellow line) in early August before pushing higher, and earlier this week Goldman broke past diagonal resistance.
Active investors can now use the above weekly chart as their base case for a continued move higher in GS stock, through a multimonth time period.
In the immediate term, Goldman shares could pull back a little, but for this chart to turn bearish in the medium term, something dramatic would have to happen.
In other words, active investors can buy the dips in the stock for an eventual move toward the $200 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.