A six point up move in GS (Goldman Sachs) yesterday, found very little media coverage. However, this quiet rally in GS was very significant from a technical perspective. This issue, finally cleared the major resistance at 118.66 with a vengeance, and traded as high as 121.24 before settling at 121.13. What is next for this highly volatile stock?
First of all, this move occurred after earlier in the week GS reported in a regulatory filing that they may be charged with civil violations, for disclosure issues in the mortgage backed securities markets. From my experience, when a stock fails to break down after negative news hits the tape, it means it is going up. Most likely, whatever fines they may receive will be a drop in the bucket compared to their overall revenue.
Secondly, GS had a quiet February of consolidation (trading the entire month in a 7 point range) after it's strong January rally from the 90 dollar area. Perhaps now that it has cleared 118.66, the stage is set for a test of the July high of 139.25. A string of closes above 118.66 would bolster the chances of this scenario coming to fruition.
Also, the positive earnings report from last quarter and upward guidance are hard to ignore. The tenor of their conference call was that the company had navigated through a volatile 2011 and has positioned themselves well for 2012. As always, one positive earnings report does not make a trend, but I am sure the company is capitalizing on the last leg up in the markets.
So how do you try and capitalize on the next move in GS? You could buy the 140 calls or any other out of the money options, but you may watch your premium erode as the stock zig-zags it's way up to your strike price the day after the options expire. You could place a bid at the level it broke out from, 118.66 and pray for a pullback with a stop at 108.66, to employ a 2 to 1 risk-reward (138.66 target). Or you could simply buy the issue now (120.50) with a stop at 118.00. That way, if the break out becomes a fake out a least your losses will be limited.
In closing, GS has paid back Warren Buffet, steered its way through a treacherous 2011 and is well positioned to participate in the Facebook IPO (which I think is going to be a gangbuster). So until the tape tells a different story, figure out a way to participate in the potential rally in Goldman Sachs.
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