Following up on Goldman Sachs' "banks conviction buy" - and what about Goldman itself?

Goldman Sachs issued a "conviction buy" recommendation for Bank of America (BAC) and other banks on Monday, which we noted and commented that investors should be very careful before wading in because these banks' chart positions aren't obviously bullish to say the least. This doesn't mean they couldn't become bullish, but it cannot happen on the buying of small investors alone - it takes huge institutional buying to move prices much higher, especially now when so many banks are planning new equity issuances. For the rest of us, it makes sense to wait until there's evidence of that kind of large-volume accumulation and then hop on to go with a rise. Otherwise, there's a lot of risk that buying in now will result in an "investment" that continues to meander or, worse, revisit the March lows. Notice that the stock price of Bank of America (below) was weak yesterday and today, with the indicators looking weak and the 200-day moving average still acting as resistance above. It's very similar to the chart of the banking index (BKX, second chart below). Most Elliott Wave analysts, including myself, would have thought that the choppy wedge pattern into the March lows signaled an end to the banks' bear market so it should be all upward from here. And that's possible, but it's also possible that they need to complete a second-wave pullback that can see prices lower for more weeks and even months. For that matter, the shape of the rally up from March doesn't look like a classic Elliott Wave impulse. It can be a bullish leading diagonal, but those tend to have very deep pullbacks, which could mean losing almost half their value before being ready for the next movement up.

I'm aware that there are also other, more bearish ways to view the Elliott Wave count, including a view that the rally has been part of a fourth-wave correction that ultimately will see the banks roll over to yet another new low. It's difficult to imagine, except when one considers the opinions of some traditional (fundamental) analysts who believe that many banks are technically insolvent. The chart pattern suggests that the jury is still out on whether the banks will test new lows. It's difficult to recommend putting one's investment dollars to work testing these risks. This is why I've got to reiterate that one is better off waiting to let chart strength prove that these are worth going along for a move up that's powered by real accumulation.

What about the chart pattern of Goldman Sachs itself? Especially since this company seems to be so much at the center of many financial-sector activities, and its recommendations are closely watched. Goldman Sachs itself has been probably the best performer on Wall Street, and maybe even one of the few best investments of any since the November lows. You can see this in a weekly chart (below). Only thing is, Goldman Sachs' stock price has now retraced almost 50% of its entire bear-market drop. The actual 50% level would be just a bit higher, approximately 147-148. Given the zone of Fibonacci retracement levels that it's reached, this places its stock price at risk of weakening off, either from here or (perhaps, but not necessarily) a little higher. This isn't just a matter of arcane mathematical calculations. The weekly chart shows that the price has moved back to swing low levels from the bear market drops that are classic chart resistance, because investors since September 2008 lost much money on the sharp drop and may have to start selling to mitigate their losses. Price is also at its 200-week moving average.

Now, these factors don't say that Goldman Sachs' stock price is guaranteed to drop. But as long as we're keeping a close eye on the bank stocks' health, we may as well encompass the financial sector including Goldman too.