Goldman Sachs Stock in Trading Range Ahead of Earnings

The Goldman Sachs Group, Inc. (GS) ended 2018 with a "key reversal" day on Dec. 26. This occurred when the stock set its 52-week low of $151.70 and then closed that day at $162.93, above the Dec. 24 high of $160.00. This buy signal set the stage for gains as 2019 began.

The key to the early-2019 rally was the stock closing above its annual pivot at $186.87 on Jan. 16. The stock set its 2019 high of $222.24 on July 26. This high was above its second half semiannual pivot at $200.49, which became a magnet between Aug. 5 and Oct. 10. With the July 26 high marking the upper end of the trading range, the low end of the range is the annual pivot at $186.87.

Fundamentally, Goldman stock is reasonably priced with a P/E ratio of 8.38 and a dividend yield of 2.50%, according to Macrotrends. This investment banking firm and component of the Dow Jones Industrial Average is expected to post earnings per share (EPS) between $5.03 and $5.14 when it reports results before the opening bell on Tuesday, Oct. 15. The investment banking giant has beaten EPS estimates in nine consecutive quarters.

In the longer term, Goldman stock is consolidating a bear market decline of 44.8% from its March 12, 2018, all-time intraday high of $275.31 to its Dec. 26 low of $151.70. The stock closed Friday, Oct. 11, at $204.68, up 22.5% year to date and in bull market territory at 34.9% above the low.

The daily chart for Goldman Sachs

Daily chart showing the share price performance of The Goldman Sachs Group, Inc. (GS)

The daily chart for Goldman shows the 44.8% decline from the March 2018 high to the Dec. 26 low. This is followed by a trading range between $186.87 and $222.24. The low end of the range is the annual pivot that was determined by inputting the Dec. 31 close of $167.05 into my proprietary analytics.

The mid-year close of $204.60 was also an input to my analytics, and the stock's semiannual pivot for the second half of 2019 is $200.49, which was a magnet between Aug. 5 and Oct. 10. The third quarter close of $207.23 was another input to my analytics, and it resulted in a fourth quarter value level at $191.59 and a risky level for October at $206.48. The stock ended last week between these two key levels.

The weekly chart for Goldman Sachs

Weekly chart showing the share price performance of The Goldman Sachs Group, Inc. (GS)

The weekly chart for Goldman is negative, with the stock below its five-week modified moving average of $205.80 and below its 200-week simple moving average, or "reversion to the mean," at $209.00. The 12 x 3 x 3 weekly slow stochastic reading declined to 52.85 last week, down from 59.81 on Oct. 4. Helping begin the 2019 rally was that the stock ended 2019 with a reading of 6.32, well below 10.00, which was an indication that the stock was "too cheap to ignore" and thus a buy.

Trading strategy: Buy Goldman Sachs shares on weakness to the quarterly and annual value levels at $191.59 and $186.87, respectively, and reduce holdings on strength to the 2019 high at $222.24. Semiannual and monthly pivots are $200.49 and $206.98, respectively.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the close on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new monthly, quarterly, and semiannual levels. The semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October, as monthly levels change at the end of each month.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

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