Three Views of Goldman Sachs Before Earnings

Jun 16, 2008: 5:25 PM CST

Financial giant Goldman Sachs (GS) reports earnings tomorrow, and while they’re expected to report lower profits, investors see a silver lining in the earning reports, and have been bidding the stock higher.  What could happen tomorrow?

Let’s take a three-timeframe view of the stock before earnings, starting with the 15-minute chart, which reflects the ‘bid-up’ that has happened in anticipation of the earnings release.

We see the chart preceding with a positive momentum divergence as price broke to new highs (on the chart), and the positive momentum condition has carried through until today, when we see our first lower peak in the oscillator as price actually formed a new high.

The negative divergence that is the dominant technical picture (on this chart) is alarming, but one knows that actual price reactions from earnings are highly unpredictable and no chart can accurately forecast what’s about to happen – they can only give us potential clues.

Nevertheless, the educational lessons to take away from this chart include the classic ‘bull flag’ example which was near picture-perfect, and the rising momentum conditions in a regularly ‘swinging’ market, with the 20 period EMA serving as trade entry and risk-management.  The chart has formed a negative momentum divergence and a potential double top.

It may prove that the best strategy was to buy in anticipation of the earnings and sell today just before they were announced.  There’s especially a lot of hype surrounding what’s possible to happen tomorrow.

Keep in mind that the stock already has risen almost $35 from its previous downswing, as evidenced in the daily chart structure:

There was a positive momentum divergence which preceded the recent strong upswing in price, which was likely driven by little more than trading on anticipation of a favorable (or at least, ‘not as bad’ earnings report) to ‘scalp’ some quick profit before the report was released.

Notice the volume has been increasing steadily as price formed a potential ‘double bottom’ at the $160 level.  Volume has picked up, confirming higher prices… but recall that many people are speculating on this stock because it has been featured in the media so prominently.

The daily structure is still ‘officially’ in a downtrend but could also be defined as being in a ‘trading range’ consolidation environment.  Price is above its key 20 and 50 period EMAs, which cannot be ignored as being bullish.

Let’s see if we can glean additional clues from the weekly chart:

Price could be in the first stages of a trend reversal back to the upside, after forming a potential higher low.  The weekly structure of the price is still in a confirmed downtrend, having made lower lows and lower highs with price being beneath its key 20 and 50 period moving averages.

Price is currently just beneath its key 20 period EMA, so should the stock gap above $190 tomorrow, this would call the downtrend into question, especially if bulls can rally price above $205 in the next few weeks.

Otherwise, failure at these levels could lead to another sell-off.  It’s difficult if not impossible to make an accurate assessment, given the volatility that’s possible tomorrow both to the upside and the downside.

My suggestion would be to wait to see if there’s any sort of gap and try to fade the gap, provided it’s less than 2% or so.  Even that could be a risky strategy with so many professional and amateur eyes focused on this financial stock.

If you’re trading this stock, or holding it overnight, prepare for the potential for a large volatile move tomorrow, and be ready to adjust should the worst-case-scenario occur for whatever your position may be.

Also, for curious traders looking for something new, be sure to take advantage of the free two-week trial to the Market Club full services without obligation.  Many people have signed up already and are able to test drive the site with unlimited access.  You can even see what the current “trade triangles” are saying about Goldman Sachs (GS) and other key stocks!

Whether you’re trading or watching, be safe in the face of earnings announcements.  It may seem great to wake up with a large profit in your account, but always be prepared for the worst case scenario ‘just in case.’

2 Comments

2 Responses to “Three Views of Goldman Sachs Before Earnings”

  1. vinaydh Says:

    I am sending you a link. I have a confusion about the MACD(3,10,16) showing a negative momentum divergence where as the MACD (12,26,9) is showing a positive divergence. Why is it like this and what should one go with in such a case? In retrospect going with the MACD(12,26,9) would have worked today.

    http://stockcharts.com/h-sc/ui?s=RIMM&p=5&yr=0&mn=0&dy=1&id=p11980912062&a=142925032

    Thanks for your help in advance.

  2. Justin Says:

    Nice analysis on GS!