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Is Goldman Sachs A Buy?

08/27/14 03:48:53 PM
by Koos van der Merwe

An inverted head & shoulders pattern at a top is unusual. Does it suggest a buy?

Security:   GS
Position:   Accumulate

Goldman Sachs (GS) has agreed to a settlement worth $1.2 billion to resolve a US regulator's claims that the bank sold Fannie Mae and Freddie Mac faulty mortgage bonds. However, the US Department Of Justice continues to investigate GS over its marketing of mortgage-backed securities. With an inverted head & shoulders developing in the chart, does this mean that GS is now a buy?

Figure 1. DAILY CHART. Here you see an inverted head & shoulder pattern plus JM Internal Band.
Graphic provided by: AdvancedGET.
The chart in Figure 1 shows the inverted head & shoulders pattern that has developed, suggesting a price target of $196.38 (174.03-151.68=22.35+174.03=196.38). Fundamentally, you can argue that investors may have guessed that the bank would come to a settlement agreement with the US regulator, but this was a gamble that may not have paid off. The inverted head & shoulders pattern that formed and the buy signals given by the JM Internal Band would definitely have influenced them in their decision making. The JM internal band is a 15-period simple moving average offset by 2% positive and 2% negative.

The indicator on the chart is a 14-period relative strength index (RSI) which is suggesting weakness since it gave a sell signal on July 25, 2014.

Figure 2. BUY SIGNAL.On this Omnitrader chart, a buy signal has been given on August 8, 2014.
Graphic provided by: Omnitrader.
The chart in Figure 2 is an Omnitrader chart suggesting a buy signal on August 8, 2014 as shown on the Vote line. The signal was given by the Red Green Strategy Long 25, and then confirmed by all the other strategies as the share price moved — with the exception of the 12-period RSI strategy. However, the share price is flirting with the upper external band suggesting that should you wish to buy the share, you are better off waiting for a pullback.

Yes, I would be a buyer of GS for a long-term hold, but I would wait for a correction before buying.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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