One of the simplest technical analysis concepts and indicators to understand and use is the moving average. Basically, it smooths out the noise; at its simplest utility, price above a rising MA is bullish and price below a falling MA is bearish. And of course, you can get fancier.
One of the most popular methodologies is what is known as a moving average crossover (“cross” for the cool kids), where signals are given as a shorter duration MA moves past a longer duration MA, e.g, if a 5-day MA moves above a 20-day MA, it’s taken as a bullish signal. Again, you can get fancier and there are nuances, but you get the idea.
And among moving average crossovers, the one known as the Golden Cross, where a 50-day MA crosses above or below the 200-day MA, is, well, the Golden Child of MA crossovers.
So, this year in stocks, with a Golden Cross having recently taken place to the upside, stock market bulls are encouraged to say the least. And rightly so, the Golden Cross has a decent record.
I asked one of my oldest technical analysis guys why I too shouldn’t be unabashedly bullish.
“Ha!” he told me. “One of the very first backtests I ever ran (on my TRS-80 with 16K of memory and a cassette deck back-up) was using a moving average crossover on an hourly chart of the NYSE Composite. Would have been 1978 or so. Sucker KILLED during a rally! Easy street, here I come. Then the market stopped trending and went into a sideways mode. Nothing extreme, just sideways. Whipsaw city. I was the one who got killed. Lesson learned.”
Bottom line? There ain’t no free lunch — including Golden Cross signals.
The new February Financial Forecast delves into the Golden Cross and notes several times when following it would simply have made you cross. Read that section now.