Goldman Sachs Divergence Trade

Jan 28, 2008: 10:26 AM CST

It seems the divergence setup is becoming one of my favorites as well. Goldman Sachs (GS) recently exhibited a lengthy divergence with a snap resolution today on the smaller timeframe, which may bode well for the stock in the short term.

Let’s look:

Typically, a divergence sets up a small target trade (retracement only), but a lengthy divergence can frequently precede a trend reversal and allow you to play for a larger target with a very tight stop.

Such is the case on the 5-minute chart today in Goldman Sachs.

A divergence occurs when a key oscillator fails to confirm a new price low in the stock. Multiple swing divergences can set up a bias in the opposite direction as – in this case – sellers were unable to push price lower at each expected sell swing.

Momentum was decreasing on the side of the bears (sellers) and increasing on the side of the bulls (buyers).

Because momentum often leads price, one could have joined the rising strength of the buyers and put on a profitable, low-risk trade.

For my momentum oscillator, I use the standard MACD in StockCharts (or any other charting service) and set the parameters to 3, 10, 16 (which is the difference in a 3 and 10 period exponential moving average that is smoothed by 16 periods).

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