Breakout Or Fake Out In Goldman Sachs?

Goldman Sachs Group Inc GS has been playing catch-up to the broad market over the last few months.

Since the end of April, it has rallied from the $160 to more than $180 in Wednesday's session.

After flirting with a breakout of more than $180 in January and again in late August, Goldman Sachs is once again trading at this key resistance level. In fact, Goldman Sachs is now trading at levels not seen since April 2010, when it peaked at $186.41. Certainly, this is a very weak relative performance when compared to many of the momentum stocks, as well as the broad market on whole.

Related Link: No Love For Goldman Sachs After Great Earnings

Long-Term Price Action

In fact, Goldman Sachs is quite a distance from its all-time high in October 2007 of $250.70, before the financial crisis of 2008 was in full swing. From that level, it swooned to $47.41 in November 2008.

Since reaching that low level, Goldman Sachs rebounded to $193.60 in October 2009, but has not able to return to it over the last five years.

Dodd-Frank Reforms

Of course, the investment banking industry has changed drastically with the Dodd-Frank reforms. The major reform that infringed on Goldman Sachs profitability was the restrictions placed on its ability to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund.

As a result, Goldman Sachs lost a major source of income for the the firm.

As the bank struggled to replace that major profit center, its stock price reflected its struggles, with an inconsistent earnings pattern despite the meteoric rise in the broad market. Even when the company posted strong earning for a quarter, it would often gap higher off the open, but finish the day in the red.

Establishes Solid Earnings Pattern

However, its earnings pattern has changed over the past few quarters and is finally being reflected in its share price. Goldman Sachs has beat Wall Street estimates for EPS over the last eight quarters.

In its most recent report on July 15, it posted its biggest beat since Q4 of 2012, when it reported EPS of $4.10 vs. $3.05 estimate and revenues of $9.13 billion, instead of the $7.97 billion estimate.

Interestingly, the issue was only modestly highly by more than $1 the following session, as it closed at at $170.47 versus its prior close of $169.17.

After laboring at $170 until August 8, Goldman Sachs finally rallied from $169.10 to $172.26. Since that time, it drifted higher for the remainder of the month and is now attempting another breakout over $180.

Analyst's Take

Wall Street analysts have been quiet on Goldman Sachs since mid-March. In fact, only two of them have made significant ratings changes.

On June 30, Bernstein downgraded the issue from Outperform to Market perform. More recently, on August 26, MKM Partners initiated coverage on Goldman Sachs with a Buy and a street-high price target of $213. The second highest price target resides with Susquehanna at $200. Societe Generale has the lowest price target at $133, and JP Morgan has an underweight rating on Goldman Sachs, with a $150.00 price target.

What Now?

After rallying to $182.07 in Wednesday's session, Goldman Sachs has retreated, along with the market, to the all-important $180 level.

For those attempting to play a breakout, it may be prudent to wait for Goldman Sachs to post a few closes over $180 before pulling the trigger. Also, if the trade is made, a corresponding tight stop should be used to prevent a huge loss if the breakout fails to materialize.

For those adventurous short players in the market, a failure to post consecutive closes over $180 may present a shorting opportunity. If that is the preferred course of action, a tight stop at Wednesday's high ($182.07) may offer a solid risk-reward if Goldman Sachs retreats to its August low of $168.02.