Goldman Sachs Triangulates to New Lows on Positive Divergence

Nov 9, 2008: 10:44 PM CST

Financial Giant turned bank Goldman Sachs (GS) formed a fresh five-year closing low on an interesting triple-swing positive divergence on the daily time frame.  Let’s view this development as well as a monthly chart spanning back to 2001.

Goldman Sachs (GS) Daily:

Goldman had strong support about the $155 level, but once that broke cleanly to the downside in September 2008, all bullish bets were off as price entered a steep move to the downside, complete with multiple violent up and down swings in price.  We closed at fresh lows Friday, but there’s a little bullish news worth discussing regarding this stock.

Goldman Sachs has set-up a rare, triple swing positive momentum divergence with the recent close, which could put a slight damper on further downside action.  Notice how the momentum oscillator trends upwards as price trends downwards.  The oscillator also made a new swing high in late October that eclipsed the earlier October high, while price made a lower high – also a positive divergence.

Generally, divergences by themselves are not reason enough to enter an aggressively bullish position, but they’re certainly reason to tighten up or perhaps consider exiting short positions (or long puts perhaps).  As you’ve seen in the past two months, Goldman has a tendency to snap back (to the upside) quickly, leaving short-sellers in the dust.

The most recent “snap-back” that resulted in a momentum divergence was near October 13th, where price surged from an intraday low beneath $80 to an intraday swing high just shy of $130 for a $50 move in three short days.

That being said, note that the moving averages are in the ‘most bearish orientation possible,’ and ideally we would not prefer getting ‘long’ until price closed above one or both of these averages, or they completed a ‘bullish’ crossover.

Let’s pull the perspective back to the Monthly chart to see just how far Goldman has fallen so quickly.

Goldman Sachs (GS) Monthly:

What took five years to build, sellers have managed to destroy in roughly one year – such is the nature of bear markets.  They can destroy gains much quicker than they were earned.  Take a look at other financial or homebuilder stocks for further examples.

Price reached a high just shy of $250 per share and have now closed under $80 in one year, destroying shareholder equity positions in the process.  Notice also how volume surged to significant highs during the ‘down-draft’ we’ve recently experienced.

Capital preservation needs to remain the #1 goal, and that might mean missing a bottom at times – but these markets have claimed many victims, and many more could be in store for the non-vigilant among us.

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