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Goldman: Readying Short Position Initiation Sequence

by: Brandon Fredrickson August 18, 2008 | about stocks: GS    

Brandon Fredrickson

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Each weekend when I do my big search for stock market ideas, my first search is by relative strength and weakness. I of course notice this during the week as well, but I try to really key in on names of stocks, sectors and groups on the weekend for further study.

On July 30th the market had what technicians refer to as a 'follow-through day', which is simply a strong rally on heavy volume at least three days after a market bottom is put in. It should ideally occur between days five and seven, and although this one occurred on day ten, it's still not something to ignore. In my case two things happen when follow through days occurs. First and foremost, I get out of my shorts. This is important, because while a follow through day certainly is not a promise of a bottom, no market bottom of any significance has ever occurred without one. I next will look at what sectors and stocks are leading the move up. In the case of this most recent rally, the leadership has primarily been in areas that had been gravely beaten down in the bear move - not a good sign - and some areas of healthcare and biotechnology. Very narrow leadership.

Since we are now at some fairly significant resistance on the major averages, both in terms of price and moving average, and the rally has hardly been what I would consider convincing, my focus has turned back to the short side of things. Just as I looked at strong stocks like AFAM, JNJ, EZPW, AMED, WGOV and GTIV that had gone down less than the market did during its bearish phase, I'm now looking at stocks that have not rallied as much as the market on this move higher. That provides me with the starting place for further analysis.

One of the sacred darlings of Wall Street has to be Goldman Sachs (GS). However, over the last several weeks as the market has rallied, including a lot of financials, Goldman has been notably absent from the party. Not only has it failed to rally, it has actually declined from a peak of $190 to its current $163 over the last few weeks. There is no doubt that Goldman operates one of the tightest ships on The Street, and its trading operations are second to none. However, I do not think that Goldman has the magic immunity pill to everything that's going on in the world. The core business is suffering, as is that of every other financial institution in America.

Over the last several quarters the Trading Desk has been able to bail Goldman Sachs out of the troubles that the rest of the operations would have created for the company. This is not something that I think is going to be accepted forever, and I don't see fresh places for Goldman to derive income from at this point. Asia, led by China, has been melting down for several months prior to the Olympics, while Europe's housing-led slowdown is going to be at least as bad as ours. I would not expect Goldman to be able to continue pulling rabbits out of its hat forever.

If you are adept at Options strategies, I'm sure there are a few you can use. As I have only been able to lose money over the course of my career trading options, I will be sticking to a straight equity short in Goldman Sachs. For all of the reasons listed above, if Goldman trades under $160 per share I will start to accumulate a short position in the stock.

Disclosure: I currently hold no position but I will short Goldman on a close or substantial intraday break below $160.

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This article has 25 comments:

  •  
    Aug 18 12:41 PM
    That is an interesting strategy... short it ony after it falls more...

    Why not short it when the price is higher so you can make a couple bucks?
    Reply
  •  
    Aug 18 01:47 PM
    Good question SoCalsurfbum, and one that should be asked more instead of just nodding and accepting.

    As I've said in a number of my articles I always start out with technical analysis, even though I feel I'm better than most when it comes to looking at a companies business and seeing what I want to do with it, there are plenty of people a lot better. My background is with technical analysis, and on breakout strategies you always wait for the price to confirm, the only way it can do so is if it trades over/under a certain price. Once you have the breakout in place and and looking at continuation patterns such as flags for example then you will be looking for better prices, a rally up to such and such to add more to the trade. Until the break under $160 occurs though I have no opinion on the stock, I'm pretty much neutral. Once that occurs, and only then, I will start to have a bearish expectation. Hope that helps.
    Reply
  •  
    Aug 18 03:47 PM
    I'm now short GS
    Reply
  •  
    Aug 18 03:52 PM
    There is strong multi-month support at the $155-160 range. MS, JPM, WB and BAC all look like good financial shorts right now.

    Reply
  •  
    Aug 18 04:44 PM
    John- There is some support coming up in that area, the market has been there coming up on three times. I'm sure you have heard about the market knocking three times and then breaking. Coming back to test something the third time is generally not a good sign, even thought it looks like support on the chart. I do agree that all of the financials are weak and likely shortable in here, in my estimation GS has some kick due to the perceptions that people have about the stock, which as I discussed above are likely to turn out wrong.

    Good luck with the CFA, it's a worthwhile course of study and a great way of looking at the world.

    All my best,
    Brandon Fredrickson
    Reply
  •  
    Aug 18 05:48 PM
    Hey Brandon, I'm actually going for the CMT. The CFA comes later when I get a little smarter. I do agree with you, financials are either breaking their supports, broke their uptrend and unable to make a new high, or forming triangles for other areas of consolidation before they do break. As got GS, I agree, and there's major stalling going on at the 50-day, with GS unable to make new highs on the 2 previous attempts. Spells trouble.
    Reply
  •  
    Aug 18 06:13 PM
    I meant to say the CMT, but at the same time was looking at the CFA study material :) Anyway, I've study the CMT material but then never got around to taking the exam, but as I've said a number of times I find technical analysis to be a good way to start when looking at stocks/markets. Good luck to you.

    Brandon
    Reply
  •  
    Aug 18 06:26 PM
    TA will make sure your number of winners greatly outnumber your losers. Since this site is mostly fundamental-based, and probably most readers are mostly FA, there's a lot of "resistance" here. I love it when I write something long or short based on TA, and someone counters me with fundamentals...just doesn't make any sense.

    Anyway, I started contributing a few days ago: seekingalpha.com/autho.... Thanks and happy trading.
    Reply
  •  
    Aug 18 06:59 PM
    You will do much better if you understand both. I'm not really so much worried about my number of winners and losers, overall I'd say that about 1/3 of my trades are profitable, 1/3 are breakeven and 1/3 of them lose money, the trick is to make more when your right. I know plenty of people who can show me they are "right" 90% of the time and they still have terrible P&Ls.
    Reply
  •  
    Aug 18 07:07 PM
    Yep, and that's why I started putting up fundamental articles on my blog as well as technical analysis to give the whole picture and not just one side. If someone is right 90% of the time and can't show a difference, they have a big mm problem. I agree, it's all based on $ and not so much #.
    Reply
  •  
    Aug 19 03:22 AM
    the company is the best among its peers. despite that profits are derived by ripping off the more stupid brokers (and slipping hedge funds) and that can't last forever if the latter dont earn bucks anywhere else.
    Reply
  •  
    Aug 19 01:33 PM
    shorting the sacred cow eh... Got to applaud the balls not so enthusiastic about the brains

    there are easier shorts than this
    Reply
  •  
    Aug 19 02:26 PM
    It's true, it's not the easiest short. But when the GS magic wears off and it has to delever its pretty massive leverage, look out below!
    Reply
  •  
    Aug 21 10:36 AM
    Good luck to you - that's a ballsy trade, if there ever was one. I personally was considering going long GS. Look at the US $. If it stays ascendant, money will pour into US equities.

    Reply
  •  
    Aug 21 01:05 PM
    Wow-- I took the plunge as you suggested, and it's looking good so far.
    Do you have a cover price in mind?
    Reply
  •  
    Aug 22 09:15 PM
    Why short GS when there's easier prey to be had, e.g. HBC (under 200 and 50 DMA with declining RSI and MACD)? You're fighting 5 months of support at the $160 line. Risk-reward seems lower than some of the other financials. Good luck in the trade, though. Hope it works for you.
    Reply
  •  
    Aug 27 01:29 PM
    Seems to be working so far.
    Reply
  •  
    Aug 28 04:38 PM
    Err... until today. Will see if it swings back the other way.
    Reply
  •  
    Aug 29 04:55 AM
    Looks like an area gap, should be able to fill quick. 5 doji's in 8 sessions signals strong support still.
    Reply
  •  
    Sep 11 10:54 AM
    Seems like a good prediction - down to 151 today.
    Reply
  •  
    Sep 15 09:38 AM
    I'm covering my GS shorts today.
    Reply
  •  
    Sep 16 10:01 AM
    Great call on GS, Brandon! Props to you!
    Reply
  •  
    Sep 16 12:06 PM
    Im not sure what 5 doji's mean. I know when I go to a dojo I sweat my ass off.
    Reply
  •  
    Sep 16 03:13 PM
    haha...doji = indecision day. Usually when a stock's open and close are within a few pennies apart. Took a while for GS to break -- props to you for finding the last one to fall.
    Reply
  •  
    Sep 17 12:05 PM
    I guess that, like Axl Rose, I coulda used "just a little patience" :)
    Reply
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