Interesting Setup in Goldman Sachs GS

Sep 10, 2008: 10:55 PM CST

I noticed a really interesting version of the “rounded reversal” pattern on the intraday charts of Goldman Sachs (GS) today.  Although I missed this trading opportunity, I wanted to share this as an example of a variation of the pattern and how it might have been traded successfully for a low-risk, high probability profit.

Let’s look.

Goldman Sachs (GS) 5-minute:

The pattern is represented by the green arrow, highlighting the gentle reversal pattern on the stock as it crests into the afternoon session.  Price gapped lower on the day and the 20 period EMA served as significant resistance – it’s almost uncanny how the 20 period EMA serves almost like a visual and automatic (curving) trendline the whole day until the rounded reversal develops and becomes the dominant pattern.

All throughout the session until 1:30, a positive momentum divergence had been developing and price formed an ultimate consolidation, almost like a bugle horn or cornucopia imagery.  It’s very rare to see such ideal consolidation into a classic apex before bursting higher into a strong impulse move.

The ideal entry came either at one of the dojis at resistance or for more conservative traders, when price broke cleanly above the 20 period EMA… or finally broke above the 50 period EMA.  However, a fast momentum market and ‘positive feedback’ burst occurred almost like a rocket as price cleared the 50 period average as short-sellers covered and new buyers emerged, quickly forcing prices remarkably higher – it would have been ideal to have been positioned ahead of this move and expecting its development due to the range contraction principle of price.

Ultimately, price reversed into the close, but for a quick day-trader, a profit of up to $4.00 could have been realized within an hour on a momentum move that barely gave any retracement.  In terms of “R-Values,” one could have achieved a multi-R value profit quickly.

Let’s take a step higher to see the structure on the 15-minute time frame and assess why the $161 per share level could have been an initial price expansion target or expected resistance.

Goldman Sachs (GS) 15-minute:

On the 15-minute chart, the falling 50 period EMA ultimately contained price from the rounded reversal pattern.  This level also corresponded with the confluence of the 20 and 200 period moving averages on the 30 minute chart, and the falling 20 period EMA on the hourly chart.  Moving averages on higher time frames can often serve as initial targets for trades entered on lower timeframes.

By closely annotating intraday charts, you will open yourself up to notating more price patterns, and the more patterns you internalize (examples you see), the better you’ll be able to act properly upon them in the heat of intraday trading.

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