Trading Goldman Sachs

After the closing bell yesterday the Securities and Exchange Commission (SEC) said that it had reached a $550 million settlement with Goldman Sachs Group, Inc that will resolve its lawsuit against the firm. This is obviously good news for Goldman Sachs the company, but how does that translate to the stock?

Well, news of the settlement seemed to be received well by investors. Shares of Goldman climbed more than 4% yesterday and today they are currently up another 2%.  So, should you jump in the stock now, and if so, which side of the trade should you be on?

Below is a chart of GS (Goldman Sachs) for you to review. The chart is from June 2009 until June of this year. I wanted to highlight an important price for this stock.

GS – 1 YR – June ’09 to June 2010

As you can see, $150 has often been an important price to this stock. Prices such as $150 tend to be important to most stocks anyway, but it is very apparent with this GS stock. Once GS broke above the June 2009 resistance at $150 it became a strong area of support in January/February of this year. After breaking below $150 in April, the stock fell lower as expected. Now look at the present day chart of GS:

GS – 1 YR

Since bottoming at $130 earlier this month, the stock has slowly rallied higher. Yesterday’s SEC settlement has sent the stock shooting higher. So, being that the stock is back at the $150 level, wouldn’t we expect it to act as resistance? If the stock were to break above that level, wouldn’t we expect the stock to go higher again?

The Tale of the Tape: GS is approaching a key level at $150. If you believe that the stock will not break higher, or it doesn’t appear to be able to, this would be an excellent time to enter a short position with a stop above the $150 level. However, if the stock breaks above that key $150 level, entering a long position with a stop below $150 would be the higher probability trade.

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT