NOVEMBER 14, 2020
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Shambling sideways isn’t up. Zombies do that. Time is money and zombies have no sense of either. Yet a volatile sideways chop creates opportunities. Snap on your Goldman Sachs chart and follow along.
Most of the time stocks exist on or above a series of support levels, prices that repeatedly call in savvy money. Stocks also routinely track up to points of resistance, a point at which savvy money recognizes as “fully valued.” “Fully valued” is always a time-specific determination.
Technical indicators clearly demonstrate such “trading ranges,” the space in between support and resistance. Such ranges can become very well defined, and thus known as “channels.” Support and resistance levels come in many varieties, including the repeating ratios known as “Fibonacci ratios.” We’re interested in such levels clearly defined and visible in chart patterns.
Is Goldman Sachs a good trade? It’s a great trade, and we’ll do it again, until the pattern breaks. Goldman is also a reasonable economic rebound play. As a company Goldman possesses all the ethical rectitude of Wells Fargo. That means none. Not to worry if you’re strictly an ESG trader or investor. The technical trading content here can be applied to any stock.
“Price-action” refers to the actual pattern, or footprint, of the share price movement. Equity traders make history pay. The price-action, or history, of every stock’s price is precisely displayed. It provides a functional support and resistance history. Charts are the historical artifact of precisely how investors/traders have treated the stock. When you know what it’s saying, you can move with the pattern, or in front of said.
Support and resistance offer traders’ historical entry and exit points–clues of when to show and when to go. Technical traders also use the Stochastic Oscillator, the Relative Strength Index, and Bollinger Bands. It’s not that hard. Here’s our Goldman trade using support, resistance, and the stochastic oscillator.
The above Goldman chart clearly displays GS’s current “trading range.” Nice–a very clearly defined channel, featuring saw-tooth price-action. Underlying support stretches all the way back in to April. Very nice. Meanwhile, the price-action provides four, full range, playable, rises. We played the last rise. Following our chart studies, we waited as the share price tracked very steadily down following a strong quarterly report. Goldman traded down for two reasons; pattern-driven institutional profit-taking, and market-wide volatility. You’ll recall that equity prices are set, and reset, by institutional money–enormous pension funds, sovereign wealth funds–think countries, index and mutual fund families like Fidelity, massive private equity funds–think Blackrock(BLK.) We established our position at $190.84, relatively near the bottom of GS’s range. We should have been more patient, as prices fell further, to $187, just as the pattern displays.
Patience and discipline pay, you and no one else. Each are acquired skills. We would have been paid more were we to have demonstrated more of each here. Prudent waiting may in fact prove the most difficult skill of either investing or trading. It’s known as “price discipline.” Nonetheless, perfection isn’t the point. A profitable trade is the point. Attempting to hit exact tops or bottoms is an idiot’s errand. Leaving with a win is always better than still ransacking when the cops show up. But how could we have improved our Goldman trade?
Smart people will tell you that you make your money when you buy. All true. Strong buys create both great investing and trading. You create your win when you buy the right thing, at a great price, in the correct market context. Everything that follows is simply management. As we stated above, technical tools help create strong buys, and sells. The Stochastic oscillator is by far our favorite single tool for spotting entry and exit points.
The oscillator’s comprised of three lines traveling within a range; the value line, or %K(shown in yellow above), the shorter smoothing moving average, or %D(in red), and the longer smoothing average, or %D slow,(blue.) That’s it. They live in a range and tell us about “over-bought” and “over-sold” conditions. Readings above 75 are considered over-bought, while those below 25 over-sold. Many traders prefer reads above 80 and below 20. Congrats to those who know and invitations to those to whom it’s new. Things are about to get much better for you. Learn this with both hands and leverage it forever. How cool is that yo?
Trading isn’t hope, or guesswork. It’s design. Knowledge, work, and skill, drive savvy trades. Everyone, at any level, can benefit from someone who knows even more. Our’s lives out in Seattle. Even the smartest trades blow up, on a regular basis. Yet most successful trades are well designed, built using the very tools we’re pointing to here.
Takeaway; the stochastic oscillator is one of a number of “over-bought and over-sold” technical tools. It’s by far our favorite. Repeating, readings above 75 indicate over-bought, while readings below 25 rank as over-sold. Why is this important? Both conditions suggest a trend change is coming, and relatively soon. Using the tool allows us to move in front of that trend shift. Know that either condition can persist for a number of “periods”(days on a daily chart, or hours on a 60-minute chart, etc.)
Takeaway; the oscillator’s current value line(yellow) displays the current value(0-100) within the scale’s boundaries(75-25). Additionally, it displays shift, direction, and velocity: up moves indicate buying pressure, sharply up is stronger buying pressure, and a V-shaped trend-shift up/cross-over of one or both of the smoothing moving average lines, indicates pronounced strength of trend shift.
Fact. We at STOCKjAW just happen to love this stuff and work it almost every day. As a result, Sj gained 12.6% on our GS trade. We bought at $190.84 on 10-28-20, and sold at $215.01 on 11-09-20, a total trade time of eleven days. And we’ll do so again. Compare that to the annual returns of most mutual funds, ETFs, or indexes. Check current CD rates–APY 0.15%.
As we noted, Goldman may continue rising. Yet we played the pattern as it exists. Our move in Goldman was always intended as a trade, not an investment. GS did create a high of $225 when it reported in July, and then promptly began selling off. That was the exception. We played the rule, for a 12.6% takeaway. We’re pleased it worked out.