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Continued Fall for Financials?

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There will be downside continuation or a rally, which, if it fails, will create a more dramatic decline.

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This week we look at a few of the financials to analyze the chart structures after Friday's major downside reversal in Goldman Sachs (GS) and other related financials.

Apart from whether Goldman is innocent or guilty of the charges levied by the SEC, the indelible impression left by Friday afternoon's trading is that Goldman stock ended something on the upside and started what could be a fairly dramatic decline.

Looking at the weekly chart going back to 2003, you can see the peak at 250 and change in October 2007 with the bear market led by the financials. Goldman Sachs got down to 47.41 in November 2008, and since then has been able to recover about two-thirds of its losses until Friday. On Friday, Goldman hit a new high for the post-January/February lows at 186.41 and plunged after the midday allegations by the SEC were announced.

The stock went from 186.41 to 155.55, and although this is a weekly chart and this is a weekly spike, this entire move occurred on Friday. This is a major, massive, one-day reversal for Goldman.

So, as far as I'm concerned, the rally from January to April is complete. Goldman Sachs broke key support along the January-April trendline at about 169 1/2-170 and continued lower and closed below its near-term up trendline.

What next?

If we choose to take most of the points along the line from November 2008 to the present, then Goldman broke its trendline at about 263-264 on Friday. If we take a more traditional approach by just connecting the lows, taking the November 2008 low and January 2009 low, that trendline comes in at 140 1/2 or so -- and Goldman has further to go before it does more significant technical damage.

My work shows Goldman in a double top from October 2009 at 193.60 and April 2010 at 186.41. The pressure of this double top has sent Goldman down so far and will test the pullback low from January at 147.81. If prices don't hold the January low, and if Goldman breaks and sustains below 147.81, the measured objective is to about 110 to 100 thereafter.
In short, Goldman has rally potential to 168-170 maximum, and support on a downside continuation to 153 to 147.80. A break of 147.80, and I'd be looking for a $40 decline in Goldman.

The Financial Select Sector SPDR (XLF) and Other Key Financial Stocks

While we're talking about the financial sector let's go over and take a look at the Financial Select Sector ETF. It, too, had a weekly downside reversal, as the up move last week peaked at 17.12 and closed at 16.36, suggesting that the XLF is starting a correction.

Unlike Goldman, however, the XLF is in generally healthy condition. The trendline from March 2009 through February 2010 crosses the price axis at roughly $15. So, it looks like the XLF has more downside to go, with a test $15 ahead. If this trendline breaks, then I think it will follow the path of Goldman and test its January pullback lows at 13.51.

The Bank of America (BAC) chart more resembles XLF than it does Goldman Sachs. But it, too, had a downside weekly reversal (we're looking at weekly charts because Goldman had such a dramatic downside reversal on a weekly basis). The peak for the entire move off the January 2009 high occurred last week on Friday morning, after earnings, at 19.86, and it closed the week at 18.41. To test the trendline from January 2009, Bank of America will have to press toward 16.20, which is exactly what I think will happen.

Citigroup (C) has a quite different chart pattern than those we've reviewed thus far, as its most recent high didn't exceed its prior high. Citigroup basically had its peak at around 5.43 in August of 2009 and a secondary high last week at 5.07, but its low didn't come this past week but the week prior, when it closed at 4.55 (it closed this week at 4.56). So, from a purely technical perspective, Citigroup didn't have a weekly reversal. Could it and should it continue lower? My suspicion, based on the chart structure, is yes, and it should test this trendline at 4.17-4.20. Should it hold, chances are Citigroup will be a buy. If it breaks then Citigroup will test its major trendline at 3.44.

Looking at Morgan Stanley (MS), it had a significant reversal this past week and it looks like the weakest of the chart structures we've examined so far. In fact, if Morgan Stanley resumes weakness early this next week and breaks 28.67, the low from this past week, it will break the trendline off the October 2008 lows and could be in a world of trouble technically.

Morgan Stanley's support line cuts across the price axes at roughly 26.5, whereas the January or February pullback low is 26.50. So, 26.5 to 26.15 is critical support, and if Morgan Stanley doesn't hold the critical support line, you can make the case that it has a pretty significant head-and-shoulders-type of pattern here that will put very intense pressure on the $26-$25 area and open the floodgates to a significant decline thereafter.

The strongest chart of all the financials is probably JPMorgan Chase (JPM). However, it, too, wasn't immune to last week's down move in reaction to Goldman Sachs. It had a downside weekly reversal as well, closing at 45.55, after making multi-month and multi-year highs earlier in the week at 48.20. Unless JPMorgan can claw its way back above 48.20, more likely than not it will continue lower and test the trendline that goes back over a year and comes in at 41.30 roughly this week. A break of 41.30 will take JPMorgan to retest its February low at 37.02.

So, what we can say in general is that we had weekly reversals in all the financials this past week. It sets the stage for downside continuation or, alternatively, a rally, which if it fails to take out the prior highs will then roll over into a more dramatic decline in continuation of the weekly downside reversal.

Mike Paulenoff is author of MPTrader.com, a live diary of his technical analysis and trade alerts on ETFs and their key component stocks.
No positions in stocks mentioned.
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