Thursday, October 11, 2012

GS bull signal

Goldman Sachs Inc. (GS), the global investment bank, pushed above its 55-day high, triggering a Turtle Trading bull signal as the confirming Relative Strength Index nudged its way into overbought territory.

As earnings loom, it's the second test for this level since GS began trading in a range from early September, with a high of $122.60 (today's breakout level) and a low of $111.90.

Last time GS moved into over bought territory on the RSI, it gained 16 points over dropping back into the mid-zone, giving an RSI sell signal.

Goldman Sachs is famous and, in some quarters, loathed. The Manhattan financial powerhouse survived the collapse of capitalist finance in 2007-2008, but did it by short-selling junk mortgage-backed securities at a time when some of its customers were buying.

It's as famous for its alumni as for its practices. Two Treasury secretaries -- Robert Rubin and Hank Paulson -- used to work for Goldman, as did Mark Carney, the governor of the Bank of Canada, Mario Draghi, the governor of the European Central Bank whose tenure has been dominated by efforts to save the euro, and Mario Monti, the prime minister of Italy, a country whose financial practices have been accused of contributing to the euro crisis.

Quite a crew.

GS was hammered hard by the recession, like everyone else, staged a sharp recovery in 2009, like everyone else, and now -- unlike everyone else, has been doing a downward zig-zag since peaking at $193.60 in October 2009.

It has tested the $90 level twice, forming a flat bottom. Today's breakout falls short of the $128.72 needed to form a higher high in the big pattern, so the jury is still out on whether GS is reversing its downtrend.

The one-day fair-price zone on the 30-minute chart runs from $119.06 to $121.69, encompassing 68.2% of the transactions surrounding the most-traded price, $119.93. The post-breakout trading has begun to produce another transadtions peak, somewhere between $122 and $122.35, but it is still far from equaling the lower peak.

GS has been trading above the zone beginning in the second hour from the market open.

Analysts are less than enthusiastic about GS, with an enthusiasm index of negative 45%, worst than the negative 35% recorded a month ago.

GS is no growth stock. Its return on equity is only 5%, and that's with long-term debt amounting to more than double equity.

The company made large, double-digit profits per share in 2009 and 2010, but the latter year showed a huge drop, and 2011 saw a decline to the single digits. Not the direction to inspire bullish confidence.

Quarterly earnings have shown no trend. Of the last 11 quarters, all but one loser has shown a profit. Eight produced upside surprises, and three surprised to the downside.

Institutions own 63% of shares -- not a high figure for a large, liquid company -- but the price is above par: It takes $1.69 in shares to control a dollar in sales.

GS on average trades 3.5 million shares a day and supports a wide selection of strike prices with open interest running in the four and five figures near the money. The front-month at-the-money calls have a 3% bid/ask spread.

Implied volatility stands at 30%, in the lower half of the six-month range. It has been trending sideways since mid-September.

Options are pricing in confidence that 68.2% of trades will fall between $111.72 and $133.03 over the next month. Options are trading like hotcakes, with volume triple the five-day average. Calls lead at 263% above the average, compared to 110% above for puts.

Goldman Sachs next publishes earnings on Oct. 16. The stock goes ex-dividend in November for a quarterly payout yielding 1.5% annualized.

Decision for my account: GS met my criteria under Turtle rules, so I opened a position. I structured it as January calls with a strike price of $115 and 11x leverage.

I also would have taken the trade using traditional trend analysis on the strength of the break above the prior near-term high of $122.60, set Sept. 14.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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