Goldman Sachs Intraday Bear Flag
December 18th, 2007 by Corey RosenbloomAs you may know, one of my most favorite chart patterns to trade recently is the bull/bear flag. Goldman Sachs (GS) presented one of the most beautiful and clear bear flags possible recently.
For a review, a bear flag occurs when there is a large momentum (price) move in one direction and then there is a shallow retracement (rise) against the initial impulse which occurs in a ‘channel’ on lower volume.
The best bear flags retrace back to the 20 period moving average, and it’s best to confirm them with a new momentum low in the bottom pane oscillator (both of which formed in this example).
While you can never predict the initial momentum impulse, you can trade its ‘ripples’ or after-effects, especially if there is a nice flag pattern that occurs after it.
With the principle “momentum precedes price,” we can expect an equal impulse in the same direction with similar or even equal magnitude as the first. The target is thus a “measured move” of the initial impulse.
As you can see above, Goldman Sachs (GS) printed this pattern exactly.
A nice Positive Momentum Divergence (in the oscillator) developed, signaling that you could have played for a win on the longside following the bear flag.
Nevertheless, when you see picture-perfect patterns, it’s best to print them and study them in your own way.
RSS
Hi Corey,
Do you still think GS has a way to play on the downside - I’ve made, and then lost again(!)quite a signifcant amount on this one. Still so much to learn: my own lack of knowledge costing me although lucky so far in that the money I’ve lost was only the money I gained over the last few days - a shame to give back but no detremental effect to capital. At what point in the day was it clear that a bear flag had formed - obvious now (that 20-20 hindsight think) but when watching the charts soemtimes hard to see the wood from the trees. A few ??? for you if you don’t mind?:
What chart type do you watch during the day 1min, greater?
Do you select a few charts to watch during the day and stick with those or..
Do you have a system which flags events to you?
With the bear flag on GS when would you have been comfortable enough to place an order - 2/3 positive ticks up?
In this kind of situation would you go with a straight order and tight stop - if so how close? or
Would you go with call options to leverage your upside more?
Comments very much welcome.
Jacksoo, Thank you for your comment.
I do think there is downside ahead, and any short positions have clear risk (stop-loss) placement in the event that the hypothesis is wrong. I see potential fundamental weakness and obvious technical weakness (I’m hoping the technical weakness is not glaringly obvious, in which case the majority will be again proven wrong).
You can’t know a bear flag has set up until the break of the retracement/flag occurs. In that case, it’s nothing more than a trade with no certainties. It’s still probabilities. When price hit resistance at the key moving average, that was your signal that a possible flag had formed and the target was the initial impulse (price) projected downwards. If it’s not achieved, take your stop (above the moving average) and move on. The odds do favor getting at least half of the target, however, and often achieving the full target.
1. I never look at the 1 min chart (I used to trade exclusively off them and found I was hectic during the day. The 5-min is my chart of choice with confirmation from the daily chart)
2. I used to watch multiple stocks based on daily patterns that would play themselves out intraday but now I’m much more into index futures, particularly the Dow-mini. It’s easier for me.
3. No, there is no filter or screen I use to find flags. They’re visual patterns. Sometimes during the day I will scan other intraday charts and I will see and sometimes trade small positions on these patterns, but it’s all visual and the same patterns the same way. It’s an ‘odds’ or numbers game.
4. I typically enter flag trades as close to the moving average as possible, and whenever possible, entering against the current action (in other words, best to get short when price is still going UP rather than wait for the actual break and join the other sellers. You’ll get better fills and executions when you sell to the buyers in this case.
5. Very tight stop. Probably 20 to 30 cents above the falling 20 period MA. 50 cents at the most. Keep in mind that the target is about $5. Perhaps the risk (stop) should have been around $1. This depends on your risk tolerance. Being risk averse, I tend to err on the side of ‘too tight stops.’ This is a personal problem and is not the optimal solution.
6. I never trade call/put options on intraday positions. It’s just a rule of mine. I don’t even swing trade with options. I’m pure stock and futures. Sometimes I’ll put on a credit spread if I want to be in a small position in a trend trade for a month or two and have defined risk points, but no, never options with scalp or intraday (or even swing) trades (for me).
Thank you for reading.