As a chartist and technical analyst, I spend an inordinate amount of time thinking about how and why prices get where they’re going. Like most who forecast markets every day, I gave up on the random walk hypothesis a long time ago. It’s simply not consistent with the evidence splayed across my monitors every single day. Goldman Sachs’ recent breakout is a great case in point.
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Two months ago, I noted that Goldman Sachs had reached a pivotal price point. From Crunch Time, posted on Nov 17.
Goldman is at a critical point in its chart where it must either break out or break down. You might think, them being Masters of The Universe and everything, the stock had done at least as well as the S&P 500.
Not so. After all this time, it climbed briefly above its .786 retrace even as SPX was approaching its 1.618 extension [our long-held upside target at 2138, which SPX essentially tagged on May 21, 2015. See: The Last Big Butterfly.]
If we look at a close-up since those 2015 highs, we can see that GS only recently started making a big comeback [after plummeting 37%.]
But, in so doing, it has merely backtested a TL from the 2009 lows and completed a Bat Pattern. In other words, it’s at stiff resistance right now. And, at roughly 7.5%, it’s the single biggest component of the Dow.
Because GS is the single biggest component of the Dow, its ability to break out was essential to the Dow’s own breakout attempt.
I had posted this chart the day before in The Dow Makes Like SPX — Matters. It aptly illustrates how the Dow — after four failed attempts to break out of its megaphone pattern and rising red channel — was mounting yet another attempt, but running into resistance at the 1.618 extension of 18,974.
For newbs, 18,974 is derived by adding 1.618 times the Dow’s drop between 2007 and 2009 to its 2009 lows: a variety of a Butterfly Pattern which, as was the case with SPX, can provide an excellent shorting opportunity.
When SPX reached its 1.618 extension [see: The Last Big Butterfly] it fell 15.2% (DJIA fell 16.2% at the same time.)
If stocks fell 15-16% again after DJIA reached its 1.618 extension 18 months later, investors might well have run for the hills. Thus, GS’s role — as leader of the Dow — was even more important.
On Nov 14, GS first reached what I considered strong, triple resistance: the .886 Fib level (white) at 209.59, the falling white TL and the rising white channel top. It sat at that price level for two weeks, waiting for its SMA10 to catch up – an indication that there were as many sellers as buyers at 205-210. Fortunately, Goldman didn’t have to look far for more buyers.
Leading up to Nov 8, daily volume had averaged 2.5 – 3.0 million shares. The stock had bumped along on top of its rising SMA10 until Nov 3-4, when it briefly fell below. On Nov 9, the day after the US election, volume spiked from 2.6 to 7.8 million shares and GS spiked 10 points (5.8%) through its .618 Fib level. The following day, it spiked another 12 points on 11.3 million shares.
Of course, stocks in general were soaring on truly massive manipulation in VIX, USDJPY and, later, CL, which wiped out the initial correction after the election results become obvious [for more, see VIX: Just Another Tool.] But, as mentioned above, they needed a reason to break out, not just rise to another reversal point.
As luck would have it, Goldman has a stock repurchase plan that offers the corporation a great deal of discretion as to when it repurchases shares. I don’t have access to the plan documents, but Goldman was kind enough to share this information in its 4th quarter earnings press release.
During the year, the firm repurchased 36.6 million shares of its common stock… including 7.6 million shares during the fourth quarter at an average cost per share of $197.80.
The first day in the 4th quarter that GS even reached 197.80 was Nov 10 (the purple arrow below), the day that volume spiked to 11.3 million shares as the stock’s 40% spike was gaining momentum.
Unless I miss my guess, we’ll learn in next quarter’s presser that purchases continued the following week in order make sure GS stayed ahead of the curve until up past the next resistance: the .886 Fib level at 227.52. It slipped through with little fanfare (the yellow arrow) on Dec 5 — again, on elevated volume — and, is returning to rebrand that former resistance as support.
Were Goldman’s actions somehow shady or inappropriate? Nope. They owe it to their shareholders to get the stock as high as legally possible. The fact that they effectively used tools at their disposal to break through resistance is a testament to their keen understanding of the way markets work and the way investors think.
Happily for the top officers and directors of the corporation, stock options were exercisable around Nov 15-16 — a couple of days after the stock repurchase plan helped goose the stock price by 20%.
For folks such as former President/COO Gary Cohn, who is the new director of the National Economic Council and Trump’s assistant for economic policy, it amounted to an extra $6 million on options exercised in that quarter alone. Beats the hell out of a gold watch.
Given the sheer number of former Goldman execs who are going to work for Donald “Drain the Swamp” Trump, I suspect there will be many more such paydays ahead for his former colleagues.
For the rest of us, the muppets trying to keep up with all the creative ways in which the market is rigged “shareholder value” is being created, GS offers some valuable lessons. The stock market isn’t really a “market” anymore. Those who ignore this fact will underperform. Those who recognize it, and create new ways to manipulate prices, will continue to reap outsized rewards.