The Golden Cross
In my first blog, I mentioned several investing styles. One of those styles being technical analysis. A popular concept of technical analysis known by many is that of the golden cross. The golden cross is defined as when a stock’s short-term moving average crosses over the stocks long-term moving average. Following is a chart of the S&P 500 since 2009 that illustrates the golden cross.
The red line on the chart represents the 50 day moving average. The green line represents the 200 day moving average. When the red line crosses over the green line from below, this is a buy signal. And you can see from the chart that if you bought into the S&P 500 at the time of the golden cross, you would be making money.
The golden cross concept can also be used as a sell signal. Looking at the chart again, when the 50 day moving average crosses over the 200 day moving average from above, this would be a time to sell. I like using the golden cross more as a buy signal rather than a sell signal. If you look at the chart though, the last sell signal was pretty powerful, and observing that signal would have saved you from losing some money.
It is worth noticing that the last date of the chart is approaching a buy signal at December 2011. The red line is about to cross the green line again from below. Well we all know what happens. The 50 day moving average did cross the 200 day moving average and today we are seeing record highs in the S&P 500.
So the golden cross has been a good indicator in the recent past. You may be wondering how good an indicator has the golden cross been since the S&P 500 started. Following is a table that answers this question.
There’s a lot of green on this table, especially since the 1940’s If you look at the red numbers, the loss is fairly small except for that one time in 1957. So the golden cross has a pretty good track record overall. It is another factor that you can take into consideration when investing. Let me know what you think with your comments.
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