When the bears are right, it could sometimes mean a great opportunity for the bulls. This seems to be the case for Goldman bulls, at least according to technical analysis.
The filing of charges against Goldman Sachs is a classic bearish news event, which drove the company's share price 12.8 percent lower last Friday. The stock's more than one percent rebound on Monday may be a result of bargain hunters piling in; and in anticipciation of strong earnings from the Wall Street heavyweight, which will report earnings on Tuesday.
One of the key concepts in technical analysis, which is apparent on Goldman's stock price chart, is the idea of divergence. Divergence is an important concept because it suggests that the trader can look behind the first impression created by a chart, or market activity.
The Relative Strength Indicator (RSI) is an excellent analysis tool for identifying divergence. The RSI compares the internal strength of a stock by looking at the average of the upwards price changes and comparing it with average of the downward price changes.
The Goldman Sachs chart has two period of RSI divergence. The first in area A, appeared when the stock hit bottom created a bottom when markets collapse during the 2008 financial meltdown. The trend line between the price lows was a downtrend. The trend line between the lows of the RSI was an uptrend. This divergence gave early warning of the Goldman Sachs trend reversal.
Area B shows agreement between the RSI trend and the price trend. It’s a confirmation, but there are better analysis tools available than the RSI for assessing these situations.
The more recent trend, highlight by Area C, is important. It shows a divergence between price trend and the RSI trend. The price trend is down, and the RSI trend for the same period is up. This divergence suggests there is a high probability the Goldman Sachs downtrend has reversed.
This suggests the selloff is simply a gut reaction to the filing of charges, and is unlikely to persevere in the days ahead.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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