Goldman Sachs Indeed Fades Upside Gap

Jun 17, 2008: 9:51 AM CST

Goldman Sachs (GS) reported earnings that beat expectations, yet the stock completed a classic “Gap Fade” as I suspected it might. Let’s take a snapshot of today’s action so far.

The one-minute chart shows the gap-fade trade clearly, such that instead of BUYING when the earnings news was reported early this morning, your best trade would have been to “fade the gap” to play for a temporary reversion to yesterday’s close, which was exactly what happened.

Your first instinct may be to run out and buy because the stock beat expectations, and that may very well work into today’s close or beyond, but the initial high probability trade was to fade the gap, as I suspected in yesterday’s post on the three views for Goldman Sachs.

What exactly happened from a news perspective?

Jordan Khan (Seeking Alpha) explains it point by point in his article “Goldman Sachs Trounces Earnings Estimates“.

A highlight:

Consensus estimates called for profit of $3.43 per share, but Goldman actually reported $4.58 per share, topping expetations by 34%!

There may indeed be more trades available in this stock for active traders, but the classic “gap-fade trade” was successful yet again, despite the overwhelmingly good news that the stock reported. Investors and traders anticipated such good news, as is evidenced in the daily price surge over the last three days.

Trading news is extremely difficult for newer traders, and can result in out-sized gains and out-sized losses. Always employ caution when trading news events, especially in higher priced, volatile stocks.

2 Comments

2 Responses to “Goldman Sachs Indeed Fades Upside Gap”

  1. Eric Says:

    See Barry’s comment about using AP stories:
    http://bigpicture.typepad.com/comments/2008/06/ap-fair-use-blo.html

  2. Corey Rosenbloom Says:

    Eric,

    Thank you so much for bringing this to my attention. Joining Barry and many others in protest of the AP attempting to sue bloggers for using their work, I will never post a link to a story by them. I will scan my posts as well and remove all links to them the same. That is outrageous.

    There are so many other sources of news and if that is their course of action, I will respond in protest accordingly and point this out to others as well.