The rubber band has finally snapped, and a bounce is upon us. Stocks across the board are clawing their way back to more respectable levels after plumbing the depths.
Count Goldman Sachs (GS) among the ranks of the climbers.
While this rebound could certainly go the distance, problems aplenty loom for buyers of GS stock. Let’s start with the fact that support levels galore have been broken amid the recent crash. Charting junkies have an oft-quoted phrase that “old support becomes new resistance” for a reason. All these prior floors are now apt to act as stubborn ceilings — fortresses of overhead supply.
Think of the growing number of Goldman Sachs stock holders now underwater in their positions. The lion’s share of this cohort is looking back with regret for not parting with their beloved GS shares before this week’s insanity. And they are all potential sellers at higher prices, making the current GS stock rally all the more likely to become one of the dead cat variety.
Further weakening the bulls’ case is Goldman’s current perch below all major moving averages. Bad things are known to happen when stocks descend below the pivotal 200-day moving average. Until GS stock can reclaim the high ground north of this moving average, all rallies are suspect.
The GS Stock Trade
Skeptics of the GS stock pop could sell bear call spreads to exploit its inability to climb much further.
Sell the Oct $205/$210 call spread for 55 cents credit. Consider it a bet that GS will remain below $205 for the month. The reward is limited to the initial 60 cent credit and will be captured provided the call options expire worthless.
The max risk is limited to the distance between strikes minus the net credit, or $4.45, and will be lost if GS somehow rallies back above $210 by Oct expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
