Tuesday, August 9, 2011

Trade Update: GS

Everything on the chart of Goldman Sachs GS says "I am massively oversold." Yet here we are short a 1/2 position. We entered short with 25 shares at $120.90 and again at $118.99 with another 1/4 position. Admittedly I was late, we should have been short from $125, when Goldman broke down below the double bottom pattern that was setting up there. Beyond that it is risky to short in these oversold conditions, which is why we do it with 1/4 positions at a time.

Now I am not saying that there is a reason to be long Goldman, but we must beware of the possibility of a turn around. On the chart above you can see the extreme and persistent violation of the Bollinger bands, the massive selling volume over 17 million shares and a sundry of reasons to expect a turn around. But what we lack so far is a turnaround day, or I prefer a turnaround pair. That is an up day on strong volume after this type of a prolonged period of extreme selling. But there is more to it than just a lot of selling. The thing to look for here is where the stock turned around in the past. I.e. we are looking for support on the chart, but to find them we have to go all the way back to 2009 and all the way down to $50. That's right $50. Don't believe me check out five year weekly chart of Goldman Sachs below.

You can see some decent support at $100 and some weaker support at $75, but the only strongest support doesn't occur until $50. So, there is still a long way it could fall even under oversold conditions.

In a perfect world the shares would fall all the way down to $50 a share where we could load up long. But in the real world the only thing we can do is look for places to add to our positions and set stops.

To see where to set our stops look at the 10 day chart in the 15 minute time period. You can see the long hard slide culminating in yesterdays low of $112.11. From there the stock rebounded sharply back to the $120 zone , but it failed to close above $120. I don't know if that was a turnaround, but if Goldman Sachs is going to reverse from here then it will do it by passing $120. This is convenient for us since our cost basis for GS is $119.95. Lets put our stop at $122.45

Sell 25 shares GS at $118.99
Stop at $122.45

Sell 25 shares GS at $120.90
Stop at $122.45

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