Update on the Goldman Sachs Rising Wedge

The following is just a small excerpt from my latest Weekly Strategy Session (please click on that hyperlink for details about trying it out). which I published for members and 12631 subscribers this past Sunday. 

The Goldman Sachs weekly chart bearish rising wedge was a thesis I advanced in these Strategy Sessions fating back to last year. Despite all of the whipsaws and proclamations by bulls for a sustained rotation into the big banks and financials, the weekly rising wedge, since 2011, on Goldman is still very much in play. As you can see, price breached the extended support trendline (lower light blue line), and recently retraced back up to it only to struggle.

Also note that Goldman is a Dow Component and is ripe for a short trade under $160, especially if the Dow finally succumbs to the selling in the Nasdaq and Russell. A close over $180 on a weekly basis likely renders this bearish rising wedge theory null and void.

For reference, the bearish rising wedge is a chart pattern that starts out with price in a wide range which soon contracts in terms of the swings as prices move higher. You are looking for at least two “reactions” or touches of the resistance trendline above, and usually three reactions of the support trendline below to help give the pattern the look of a wedge.

This theory behind the pattern is often difficult to grasp, in the sense that it is tough to call a pattern of higher highs and higher lows bearish. Moreover, the bearish rising wedge pattern is often a trap that eager bears fall into, as their yearning to call a major top sees them aggressively shorting an assumed breakdown (which often does not come to fruition) while price still works through an overall uptrend.

To defend against those kinds of blunders, consider that, as with all potential reversal patterns and candlesticks, overall chart context and maintaing trading discipline are key. The bearish rising wedge is most valid after a prior, established uptrend. The psychology of the pattern denotes that buyers are slowly losing their grip on the market as the price range narrows.

Of course, confirmation to the pattern in the form of a powerful breach and hold below the support trendline gives bears the best shot at actually capitalizing on the reversal, since otherwise the pattern can certainly either morph into another chart formation or prove to be a trap that eventually sees prices going much higher.

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