How to Trade Goldman Sachs on Earnings Run to New Highs

Goldman Sachs hit a new 52-week high on earnings. Here's how to trade the stock now.
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Now that Bank of America  (BAC) - Get Report and Goldman Sachs  (GS) - Get Report have reported, we’ve heard from most of the big banks this earnings season.

Some have been bad, like Wells Fargo  (WFC) - Get Report, while others have been good, like Citigroup  (C) - Get Report. The report from Goldman Sachs required a little more digging by investors, as shown by the lower open, then the reversal with the stock up 1% and hitting 52-week highs.

Fourth-quarter revenue surged 23% to $9.96 billion, smashing consensus estimates of $8.906 billion by more than $1 billion. However, that big beat was overshadowed by earnings, which slumped 41% year over year to $4.69 a share and badly missed estimates of $5.46.

The wide miss initially sent shares lower on the day, but the stock has rebounded as investors have dug through the numbers a bit more. A $1.1 billion litigation charge was the culprit to Goldman’s big earnings miss, which shaved off more than $3 a share in profit.

Without the charge, Goldman Sachs would have posted robust beats on both the top and bottom line.

Citigroup and Goldman Sachs are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells C or GS? Learn more now.

Trading Goldman Sachs Stock

Daily chart of Goldman Sachs stock. 

Daily chart of Goldman Sachs stock. 

Goldman Sachs shares have been on fire. Last week’s gap up over $240 sent shares over short-term resistance and established a new short-term range between $240 and $250. 

You’ll notice that last week’s rally sent Goldman Sachs over trend resistance (blue line), and while momentum is strong - as highlighted by the very strong volume accumulation - shares are reaching an overbought condition (blue circle).

A look at the weekly chart below highlights a similar development. That is, Goldman Sachs is launching over trend resistance and the $240 level, with strong volume accumulation and an overbought condition.

Now investors are wondering what’s next.

Weekly chart of Goldman Sachs stock.  

Weekly chart of Goldman Sachs stock.  

On both a weekly and daily basis, it would be encouraging for bulls to hold up above the $240 level and the 20-day moving average. Below puts the 10-week moving average at $229 on the table. In that case, investors will also be looking at a possible test of the 50-day moving average near $226 and uptrend support (blue line).

On the upside, Goldman Sachs stock needs to clear $250. If it can, it puts the $260 to $265 area on the table (blue box on the weekly chart). While shares are overbought and have historically struggled over the past few years when reaching these levels on the relative strength index (blue circles), it doesn’t mean GS shares can’t continue higher.

However, it suggests that when the uptrend does finally end Goldman Sachs may need time to consolidate in the intermediate term.

The bottom line: Over $240 and bulls are OK, while over $250 is a breakout trigger. Below $240 and the trade turns more cautious. Below the 20-day moving average puts the 50-day moving average in play.