The Goldman Rule

By: Steven Vincent | Sat, Apr 17, 2010
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I don't usually analyze news events such as the SEC lawsuit against Goldman Sachs. As a trader I am only interested in the market's reaction to news, not the content of the particular item. In this case, I will weigh in on its significance first as a concerned ciitizen first and then as a trader.

Citizen Steven Speaks

We all know that Goldman Sachs is commonly referred to, even in the mainstream financial media, as "Government Sachs". The revolving door passing personnel between GS and all of the relevant government departments and agencies--Treasury, Federal Reserve, SEC, SIPC, CFTC and the rest of the financial alphabet--is so well established and obvious that it barely merits mention. The simple fact is that GS and the rest of its Wall Street ilk run the government and own its financial regulatory apparatus. Apparently the fact is too well known for comfort since it appears that The Firm is now assaulting itself in public with the instrument of public law.

Let me state this plainly. Anyone who thinks that there is any sort of honest attempt by the SEC and the Obama administration to in any way impinge on the wholesale looting perpetrated by the GS mafia much less carry through with an actual prosecution is entirely deluded. The only question worth asking is why Government Sachs is choosing to pretend to bring suit against itself and make a public issue of some of its behavior at this juncture. I've got some good, plausible answers to that.

My Top Four Reasons Why the Goldman Fraud Suit is Itself a Fraud

1) The Obama Sachs presidency is in trouble. People aren't buying into the populist rhetoric. And the administration's intimate links to the financial oligarchy and its continuation of the Bush era policies and bailouts is well known to the public. Pretending to out and prosecute GS is an attempt to restore the credibility of Obama as the people power president.

2) The Democrats are in danger of losing the House and maybe even the Senate in November. The case will likely be dragged out for months on end with endless public hearings featuring indignant Dem congress members grilling GS execs and seeming to shine like pure paragons of virtue. They are entirely responsible for enacting the enabling legislation that made the entire criminal scheme possible, but no matter, for a season they will seem as public knights in shining armor. Of course the lame, truncated result of the entire affair are likely some 18 months away, long after the election results have been tabulated.

3) The "Financial Regulatory Reform" legislation is languishing in Congress. Like the Federal Reserve Act of 1913, which was sold as a way to reign in "the money trust" yet in fact gave the same financial powers direct control over the nation's financial system, the package of "reforms" will do nothing but further the control by the criminal gang of banksters through their wholly owned subsidiary of the United States Government. What better way to get their legislation passed than to manufacture a controlled cause celebre in which the real issues are obscured yet public ire is rallied?

4) First GS and Co. scared the public out of their retirement savings with threats of financial armageddon and since then, have used the public bailout money to run the SPX up 547 points. Recently the public have begun to re-enter the market at these higher levels--just in time to be fleeced again by another mini financial panic. What better way to force a correction and wipe out the late comers than a self-inflicted wound which scares the horses into a stampede and obscures all culpability of the same?

Given more time I am sure I could come up with even more Machiavellian machinations lurking behind this news event. GS and its accomplices on Wall Street, corporate America and the government are the most rapacious, scheming, plotting gang of criminals to ever run a first world nuclear power. It's the Goldman Rule: he who owns the government is Goldman and rules.

Trader Steve Responds

Ahem. And now from the trader's perspective:

The market went into earnings season and the Goldman thing very overbought on every time frame with bullish sentiment high, volatility low and signs of the public piling on to the rally. In other words, it was ripe for a correction. But there were real signs that the bull run was moving into an acceleration phase.

Overnight, there were some signs that traders where prone to "sell the news" on earnings as GOOG and AMD earnings sparked after hours selling and a dip in the futures and markets overseas took some money off the table. We've seen "sell the news" when the market is overbought early in earnings season before.

After a dip of about .5% the indices had rallied back to nearly breakeven before the Goldman news broke. The market may have even ended the day to the good had it not been for the announcement.

In January, European debt concerns stimulated the last significant correction. There was, in that case, the potential to really affect the integrity of world markets and economies and the fears of a renewed deflationary debacle seemed valid. Yet we saw that in fairly short order the market's initial reaction of fear based selling did nothing but create a buying opportunity.

If you are a trader sitting on a big, fat profit then you have sufficient reason to bank that gain already. All you lack is a motivation. The GS news provided that today. A public relations driven lawsuit against Goldman does not rise to the level of sovereign debt default and will not, in and of itself, be the cause of a significant market correction.

My expectation is that after an initial profit preserving selling wave, which should persist through early next week, the buyers will swoop in and take up the slack. In a bull market, buying into news induced fear is often the best way to enter since it quickly clears weak hands and fast money out so that the market can move in your favor right away. The depth and duration of the correction will likely be shaped by the earnings and news flow over the coming days. If traders are ready to book profits they will take advantage of the support offered by strong earnings to pass their shares on to longer term investors and the back and forth will produce a flat correction. If traders are not willing to part with their positions then buyers will be forced to chase and we may see higher prices quickly. If buyers are waiting for a good washout before stepping in then the selloff will likely be another sharp zigzag like the June and January declines.

My guess is that there are sufficient buyers waiting with arms open below to catch the falling stock from anxious longs and recalcitrant shorts and we will see a large ranging ABC flat correction of the wave off the February bottom. Bears will likely see it as a topping process and will renew their shorting attempts, "The Top" will be called by many, puts will quickly be favored over calls and technical indicators will correct from overbought. I give this process two weeks or less to unfold and a final retracement of 23.6% of the gains from the February 5th bottom. Initial support at 1180-1178 should find buyers. After that the next wave higher should take SPX to 1228-1244.

I count this as a correction within the fifth wave off the bottom from March 2009. The completion of this five wave cycle could come in the 1330 area sometime in mid summer.

An alternate scenario is that we have seen the Wave 5 of 5 top on Tax Day. I regard that as unlikely at this time, but should that turn out to be the case then we will see a major multi-month correction that will give the bulls pause and the bears hope.

Or we could see the market plunge lower in a never ending death spiral all because a lawsuit against the Godmen really is the end of the world as we know it.

Disclosure: Long SPX



Steven Vincent

Author: Steven Vincent

Steven Vincent

Steven Vincent

Steven Vincent has been studying and trading the markets since 1998 and is a member of the Market Technicians Association. He is proprietor of BullBear Trading ( which provides market analysis, timing and guidance to subscribers. He focuses on intermediate to long term swing trading. When he is not charting and analyzing the markets he teaches yoga and meditation in Los Angeles.

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