Today, October 15, 2012, Goldman Sachs traded above EBV-3 or as we say, “Breaking out of the Blue”. This occurs when an equity, which was trading below EBV-3, transits up through EBV-3. Goldman will report its’ third quarter earnings tomorrow morning, however market participants seem to know that good news will be reported.
Here is the model price chart as of tonight’s computer run.
Goldman Sachs with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of GS subsequent to this post will be maintained on Facebook, here.
Also what I like about Goldman’s trading is the breakout pull back, which has occurred over the last six weeks. Experience tells me this trading pattern has a high probability of success. Yes, the market seems to test on the first transit whether the stock actually belongs in the zone. So the stock transits, pulls back, and transits a second time, confirming the stock actually belongs in the new zone.
Also, I have reproduced the long-term model price chart on Facebook. What I like about this chart is the 1-2-3 formation Goldman Sachs seems to be producing over the last year. I am NOT a Technical Analyst, which I disclose many times in the media, however the one and only formation I do respect are 1-2-3 high’s signaling important market tops and conversely 1-2-3 low’s signaling market bottoms. As I have highlighted, Goldman is about to complete a 1-2-3 bottom on monthly price bars over the last year.
Goldman Sachs with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
This has happened before.
Goldman tried to transit up through EBV-3 on February 5, 2012, which I blogged about here. I noted in this blog that if Goldman transited back down through EBV-3, the trading strategy would be ineffective or EBV-3 should be your stop loss. Well Goldman did exactly this in April of this year. Why? Not sure. But earlier this year the financials as a group looked like they were transiting up on improving fundamentals. Obviously, fundamentally something happened which caused Goldman and JP Morgan to transit back down through EBV-3. (The ”London Whale” perhaps.)
Fundamentally, if Goldman transits up through EBV-3, the market is recognizing the stated assets on Goldman’s balance sheet is accruing value. That asset prices, stated loans, and whatever assets Goldman has on its estimated $1 trillion dollar balance sheet is going up!
Why should you care?
1. The US has been in a bear market for the last 5 years. The financials led us in; the financials need to lead us out. There are clues or data points this bear market has run its course, Goldman represents a big piece of the puzzle.
2. Transits up through EBV-3 can quickly send a stock to EBV, or our definition of stated book value, when market participants believe the stated values on the company’s balance sheet. Which for investors can be very profitable. Please note just as my first blog pointed out, any transits down through EBV-3 would be negative for Goldman and my stop or sell point.