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Golden Cross Moving Average

The golden cross moving average is a widely followed technical indicator. The formation of a golden cross is a bullish sign for investors. A golden cross forms when a shorter-term moving average rises through a longer-term moving average. Both moving averages must be moving upward. Most investors view the 50-day moving average rising through the 200-day moving average as the true golden cross. However, any time a shorter-term moving average rises through a longer-term moving average you can say you have a golden cross.

Why Follow the Golden Cross Moving Average

According to Birinyi Associates, the S&P 500 has delivered 16 golden cross moving averages using the 50 and the 200-day moving averages. Seventy-five percent of the time, the market was up an average of 4.4 percent in the following six months. Moreover, 26 times in the past 50 years the S&P 500’s short-term average crossed above the long-term gauge. The index rose 81 percent of the time with an average increase of 6.6 percent in the next six months, the data show.

Many investors who use technical analysis follow the golden cross moving average. Like any momentum indicator, the golden cross moving average provides an investor another tool to help make prudent investing decisions.

By definition, a golden cross is a lagging indicator. In order for the shorter-term moving average to rise through the longer term moving average, the market must have turned up earlier. Rather the golden cross acts as a confirmation that the market is in an uptrend. When you see a golden cross, you have more confidence that the market will remain in the uptrend.

The chart below shows a recent occurrence of the golden cross using the daily S&P 500. Assuming a closing price of 1,319, we might expect the S&P 500 top climb 4.4% to 3,177. With the close on Friday March 2, 2012 at 1,361; the S&P 500 has exceeded the average of 4.4 percent in its most recent rise. This implies that the rally may be nearer an end than a beginning.

 

Looking at a 5-year chart reveals the S&P 500 has experienced three golden crosses, each followed by a further rise in the index. In one case, the index climbed about 34% and another about 13% before turning back down. This supports the idea that a moving average golden cross is a positive indicator for the market to continue to rally for a while. However, in each case the rally ended with a pull back, creating another buying opportunity.

 

The idea that a golden cross tells us we might see a pullback in the market in the next several months is another way to use this technical indicator. Once you have a golden cross, look to buy on the next pull back rather than chase the rally that has been underway creating the moving average golden cross.

How to Use the Golden Cross Moving Average

Since the golden cross moving average is a lagging indicator, you should use it to confirm that the uptrend is likely to remain positive for the near term. Given the statistical performance of the moving average golden cross, investors should expect the market to continue its rally for at least several more months.

Can you use the golden cross moving average over shorter time frames? Of course. Just remember, this is a lagging indicator so it only confirms that the market is in an uptrend over the time frame selected. If you use it as a buying indicator, be sure that other technical indicators are signaling a buy.

That is why you should have several technical indicators in your investor’s tool kit.

In addition to our fundamental analysis, we like to use the slope of the 150-day moving average, the MACD indicator, the RSI indicator and the Slow Stochastic indicator to help establish the best entry points. As mentioned earlier, the cross of the 50-day moving average up through the 200-day moving average forming the golden cross act as a lagging indicator, confirming the current trend.

One caveat before we end. With so many investors and traders following the market, the golden cross moving average might be less useful if everyone believes in the indicator. The best returns come when you uncover an opportunity that is not yet identified by the vast majority. With so many investors able to track and measure the golden cross, it does not give you much of an edge.


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