I noticed that the first blog I wrote on GS from a few days ago received a few comments/questions.  Let me share a bit more of my analysis on why I was interested in trading GS the day following earnings and specifically how I selected possible entry points for trades.

GS is one of the most difficult market leaders to trade intraday on a daily basis.  In common trading parlance it does not trade “cleanly”.  So unlike a BIDU that I believe can be traded almost on a daily basis for consistent profits, GS needs some type of fresh news or technical catalyst to present good risk/reward trades intraday.

GS reported earnings on Tuesday and had some fairly bullish price action.  It did sell off in the afternoon but the SPY got clobbered in the afternoon as well.  The  market action overall boded well for GS in that each hard individual sell off in the market has recently been followed by the market being bought the following day (i’m pretty sure most market participants are aware of this pattern at this point so be prepared for two hard down days in a row soon).

I have added the weekly chart to illustrate my overall view that GS had clearly established a yearly low and had begun to reassert itself as a market leader.  It had rallied on a percentage basis from the beginning of September more than the SPY and clearly had separated itself from the withering retail financial names.  So I was mentally prepared for more market players to put money to work and if offered low risk/high reward entry points on the long side I was going to take them.  Also, if GS close above 158 I was prepared to hold some as a swing position.

Now to the actual trades….

1. The first trade was the riskiest as it was taken in the first 30 minutes of trading when price discovery tends to create some pretty interesting gyrations.  But I clearly told our traders that I was going to buy in the 156.50 area based on the prior day’s afternoon support and was not going to walk away from that commitment.  As GS traded down to 156.50 there was some good size bids in the mid 156.40s offering me protection and information on how strong the sell interest would be below this level.  This entry point can be described as both technical and tape oriented.  Using a support level from the prior afternoon is a technical indicator and watching the bids/offers on the Level II and not seeing aggressive selling at my possible entry point gave me confidence to get long.
2. The second entry point I mentioned was 155.  This entry price was brought to my attention by one of our traders who had watched GS the previous day.  GS had an explosive move from this level the prior day.  Stocks tend to support levels from which they had explosive moves if they return to those prices not to far off in time.  For intraday trading this means that if on the “Second Day” a stock trades down to an inflection point from the previous day there is a high probability that it will bounce from this level.  It turned out in this specific instance that there was a clear buyer on the tape at 154.97 presenting an opportunity to get long, which I previously stated that I failed to act on.  My hesitation was mainly a function of the fact that the intraday momentum for the stock was down, so my instinct was to wait for more confirmation that GS would turn back up.  That hesitation brings us to the next possible entry point.
3. You can see on the 15 minute chart below that after bouncing from 155 GS ran out of steam at 156.  There was selling at this level.  There was a very shallow pullback from the level though.  This price action was indicative of a downtrend that was beginning to turn.  When the sellers lifted at 156 GS had an explosive up move which signified a change in its intraday trend.  Coincidentally an algorithm that I run that measures change in momentum signaled a buy when GS traded above 156 as well.  I have been testing this algorithm for two weeks and each time it has offered a signal that matched with my own discretionary trading decisions it has been successful.
4. GS continued to trade higher topping out at an intraday high of 157.80.  At this point I was very confident that it would now trend up for the rest of the day so I was interested in being long on a pullback.  I began to look for the down move to slow as it got closer to 157.  I initiated a long position at 157.20 and bought some more at 157.  The correct stop for this position was below 156.80 a point from the high.  I set my stop below 156.90 which was 30 cents from my initial entry.  I have found that if a stock trades more than 30 cents against me I rarely in a winning position.  The problem with the 30 cent rule in this instance is I used it from an aggressive initial entry point and not from my “dream” entry point of 157.  I was stopped out at 156.89 but the stock did not trade lower.  I was already off the desk at this point working on firm business.
5. The next possible entry point was during the next hour when GS would not drop below its retracement low of 156.89.  This trade is 100% technical and is incredibly effective.  When a stock has a change in direction/momentum eventually it has some type of retracement/pullback.  Once this pullback is complete a pullback low/high is established and this price can be used as a stop for a position that you initiate in the direction of the larger trend.  As you can see from the chart this pullback low was never violated the rest of the day.
6. The final possible entry in GS was when it traded above its premarket and intraday resistance of 158.  This entry point had three factors in its favor.  #1 stocks that trade above their premarket highs tend to trade higher.  #2 this level had been tested earlier in the day and was rejected on heavy volume establishing as a clear inflection point.  #3 there was tight consolidation right below the level showing strong interest from buyers and #4 there was a strong increase in volume as it broke above 158 confirming the uptrend for the day.  Note that this increase in volume at 12:30PM confirms that many were interested in being long as it got above this key level even if it was the middle of the trading day.

Wow, that took awhile to write.  Next time I’m gonna do a video blog 🙂