How do you know when a trend is breaking down? The answer might surprise you. Let’s look at Goldman Sachs (GS) (April 07, 2014)

by DAN Discussed in this article: The Goldman Sachs Group Inc. ( $GS )

I want to look at Goldman Sachs ( NYSE:GS ) here. I had mentioned in the Weekend Update that if Goldman Sachs ( NYSE:GS ) broke this support level it’s probably going lower, that’s what happened. That wasn’t a prediction on my part, it was me saying, “Hey, guess what, if support breaks down it’s breaking down, and that means the stock’s going lower,” and that’s what happened. Think about it this way though, what’s really going on is, everybody that bought here is a loser, they’re losing money; all of these people right here, it doesn’t really matter that far back, nobody who bought here is still regretting it and likely to sell here, it doesn’t happen, so we’re talking about the short-term dynamics of trading. But when this stock breaks down you just know that you’re going to get some follow on selling, particularly with the market as it is.

Now, after two big days of selling I would actually expect a little bit of a snap back tomorrow just as a function of dynamics; not that I can say, “Well the market’s misunderstanding this stock and tomorrow buyers are going to come in because they realize that the bears are wrong, and that this is an amazingly cheap stock right here, and everybody’s going to come for it, and it’s going to move up to $180.00. We’re all going to have lost 15 pounds, we’re going to look 15 years younger, and all of a sudden our wife or our husband is going to be really nice to us all the time.”

Okay, we’re not talking fantasy here, we’re talking reality; so what I’m saying is, if I had to choose between being long or short Goldman ( NYSE:GS ), I would be short simply because if we get a bounce, I could see a little bounce tomorrow, I’m not sure that it’s going to happen, and like I said, if I had to choose whether to be long or short I would be short, but we’ll probably get some kind of a bounce tomorrow. I don’t see it amounting to much, because of all the pain among the buyers here.

Look at this trendline, this is a pretty solid trendline, we go further, this broke it a little bit so that’s good, we keep going, and here’s the deal, here’s support, so now this is just breaking support. This is the first sign that this trend is ending; this is it, this is the first sign, only now are you going to say, “Okay, well I’ve got to sell this stock.” Not really, you’ve got to look at the highs, and I’m giving your pearls here, if you can draw a resistance line across at least three points, because if it’s two points that’s not the resistance line, that’s just the shortest distance between two points.

It takes three points to make a valid trend line, here we have four, and then five, again, this went above it, and that’s a good thing, but the trendline still stands. Then the next high did not come up to meet that, so this actually failed to confirm the resistance line. That was actually the first indication; that was the first indication that this thing could sell-off. Now, that’s not to say that you want to short this and expect this, no, not at all. What it’s saying is, you look at this, you say, “Danger Will Robinson, red flag”, you keep your stop just a little bit below that level, you keep your stop down about there, and then you’re not going to get caught off guard when the stock does sell off.

Free Chart