Goldman Sachs Stock Poised to Breakdown Following Bearish Sell Signal

Goldman Sachs Group (NYSE:GS) gapped lower on Monday and continued to trade down on Tuesday.  Financials have been under significant pressure following announcements by JP Morgan, which puts into question trading revenues for financial companies in the second quarter.

Future Earnings

JPM reported its equity and fixed-income trading revenue could continue to decline by nearly 20% as compared to this time last year.  This announcement reflects only the first month of the second quarter, which does not bode well for financials stocks. In 2013, trading generated $15.7 billion for Goldman Sachs or about 46 percent of the firm’s total.

Additionally, financials usually generate revenues from borrowing short and lending long.  They can accomplish this when long-term interest rates increase relative to short term interest rates.  Unfortunately, the interest rate curve between the 2-year yield and the 10-year yield has been narrowing, which further creates headwinds for financial stocks.

Momentum on Goldman Sachs Stock 

A sell signal was generated by the MACD (moving average convergence divergence) index.  This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread.  The MACD is an indicator that pin points changes in momentum.

The MACD index moved from positive territory to negative territory confirming the bearish MACD sell signal.

Earlier in May, a new long-term trend was initiated as the 50-day moving average crossed below the 200-day moving average.  This crossover is known as the “death cross” and signifies that a long term down trend is in place.

goldman-sachs-stock

Goldman Sachs gapped down, on Monday, as financial stocks sold off.  A second gap below trend line support would create a breakdown gap, which usually occurs with heavy volume.

Support and Resistance for Goldman Sachs Stock

Goldman Sachs stock is poised to test horizontal trend line support, which was created by connecting the lows in October of 2013 to the lows in April, which comes in at $152.  Resistance is seen near the 200-day moving average at 4163.70.

The weekly chart of GS shows that the stock broke down below its 50-week moving average in April, and is poised to test support near the 200-day movign average near $135.  Additional support is seen near and upward sloping trend line near $120.

Price action attempted to break higher at the beginning of 2014 but was unable to break through horizontal trend line resistance near $180.

Weekly momentum on Goldman Sachs stock is negative as the MACD (moving average convergence divergence) index is printing a reading below the zero index level and shows a downward sloping trajectory.

goldman-sachs-stock-chart

Trading Goldman Sachs Stock 

Investors looking to take advantage of the negative momentum in GS could short the stock near the top of the daily gap that occurred on Monday at $158.

Investors could consider taking profits near $135, which coincides with the 200-day moving average. That would translate into a profit of 15%.  A close above the 200-day moving average would prudent place to stop out.

A second way an investor could take a position that benefits from the negative momentum in Goldman Sachs is to purchase a put option.  A put option is the right but not the obligation to short GS at a specific price on or before a certain date.

Premiums on Goldman Sachs are relatively inexpensive currently, as the distance options traders believe GS will move, referred to as implied volatility, is currently trading at the bottom of its 52-week range.

The GS July $145 Strike Puts (GS140719P00145000) are trading with a bid / offer of $2.05 – $2.15. I would recommend a purchase of these puts at $2.10, with a take profit that is 70% of the value of the option at $3.55 and a stop loss that is 50% of the option value at $1.05.

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Published by Wyatt Investment Research at