A Head & Shoulders For Goldman

07/07/08 01:09:36 PM

by Arthur Hill

Goldman Sachs formed a large head & shoulders pattern over the last four months, and a neckline support break would have long-term bearish implications.

Security: GS
Position: Sell

Figure 1 shows daily candlesticks with the head & shoulders pattern extending from March to June. There was a one-day spike below 150, but the stock recovered the next day. With such a quick recovery, I elected to ignore this spike and drew trendlines from the other March lows. As such, the left shoulder formed in March to April, the head formed with the May 2nd high, and the right shoulder is currently under construction. Neckline support resides around 160 and a break below this level would confirm the pattern.

FIGURE 1: GS, DAILY. Here are daily candlesticks with the head & shoulders pattern extending from March to June.

Graphic provided by: TeleChart2007.

Downside volume and momentum are picking up. The decline over the last few days occurred with expanding downside volume, which shows increased selling pressure. The bottom indicator window shows a -DI (negative directional indicator) and +DI (positive directional indicator), which are part of the average directional movement index (ADX) system from J. Welles Wilder. -DI moved above +DI in mid-June, and this shows that downside momentum is also picking up. The final straw would be a break below neckline support. Such a move would argue for a decline equal to the height of the pattern (~40 points) and project further weakness to around 120 (160 - 40 = 120).

FIGURE 2: GS, WEEKLY. GS is trading near a trendline extending up from June 2004.

Graphic provided by: TeleChart2007.

The long-term implications for this head & shoulders are clear on the weekly chart (Figure 2). GS is trading near a trendline extending up from June 2004. A break below this major trendline would argue for the start of a long-term downtrend. There are already signs of a long-term reversal with the other trendline breaks (red arrows). A break below the third and final trendline would fully reverse the long-term uptrend.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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HEAD & SHOULDERS

A Head & Shoulders For Goldman

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