The golden cross is a commonly referenced technical indicator in stock market analysis when a short-term moving average crosses a longer-term moving average in the positive direction indicating a possible bullish move. While this type of move can be described with a variety of moving averages, typically the golden cross refers to when the 50-day moving average crosses the 200-day moving average as the 50-day moving average moves higher.
The above image demonstrates what a stock chart might look like and how the 200-day and 50-day moving averages move along with the periodic stock price. When the 50-day moving average crosses above the 200-day moving average, this would be considering the golden cross.
Note that the opposite situation is sometimes referred to as a “death cross” – when the 50-day moving averages crosses below the 200-day moving average. This is considered by some to be a bearish indicator on the stock.
Do you have to only consider the 50-day and 200-day moving averages?
Some traders will look at much shorter windows for trading purposes. For instances, some traders might look at a 5-minute moving average against a 20-minute moving average and make day trades based on such golden cross like movements. This is a pretty different type of situation compared with the standard 50-day and 200-day golden cross, especially when we’re looking at the broad market. While the golden cross indicator is used widely for individual stocks, it’s also one of the most widely followed broad market indicators. When the S&P 500, for example, has its 50-day moving average move above the 200-day moving average and thus forming the golden cross for this broad market index, just about all investors and traders take notice.
Limitations of the golden cross & technical analysis
The commonly noted limitations of the golden cross are similar to the limitations of all technical analysis. First, this and all other technical indicators are lagging indicators. These indicators are observed signals based on recent and current movement in a security or broad market. As prudent investors know, no lagging indicator can perfectly predict future events. Critics of technical analysis will often note that technical indicators do nothing more than just describe what has already taken place and are worthless at predicting future moves. Since future moves are what we care about, if accurate, this would basically destroy any point in using technical analysis.
But proponents of technical analysis push back on some of the common criticisms. Some technical analysis gurus like to note that the advantage of using technical analysis is that it does not care about the company behind the stock. By removing any emotion, connection or bias regarding the company itself, the investor or trader can simple focus on the stock charts and movements. This focus can lead to unemotional trading and better outcomes.
To say, however, that no technical analysis works is a mistake. I know traders who have successfully implemented trading strategies using a few technical analysis techniques that have a high success rate over long periods of time. But the discussion about the why the strategy works is an interesting one in my opinion. Some believe that technical analysis works on occasion simply because of its self-fulfilling characteristic.
What do we mean by self-fulfilling? There is a school of thought that when a technical signal occurs (e.g. the golden cross signal), then traders that trade based on it can often have success simply because there are many other traders doing the same thing, and the herd mentality results in a move in the stock that lines up with the original trading strategy to begin with. Thus, trading the technical indicator “works.” Of course, when this happen, you’ll have some winners and some losers as the traders who act first will benefit from the other traders piling in and moving the security in the direction that benefits the early movers. The late movers aren’t likely to benefit as much and might even lose.
Regardless of whether or not this is the true reason for any successful technical analysis-driven trade, the reality is that it can make sense for all investors (regardless of their view on technical analysis) to be aware of technical signals simply because so many traders are acting on them and that in and of itself can move the market.
A history of broad market golden cross moves
The S&P 500 has an interesting history of golden cross moves (and death cross moves). The following chart shows the S&P 500 over the last 5 years (as of writing) along with the 50-day moving average and the 200-day moving average.
As you can see in the above chart, the S&P 500 saw a major golden cross moment back in April of 2016 which led to a prolonged upward move in the stock market. The S&P 500’s 50-day moving average dipped below the 200-day moving average briefly during the December 2018 correction, but then crossed back above the 200-day moving average in April of 2019.
With the 2020 stock market crash, the 50-day moving average once again dropped below the 200-day moving average. With the recent rebound, stocks have come up quite a bit and the 50-day moving average is once again close to crossing the 200-day moving average. We might have another golden cross signal in the S&P 500 very soon (as of late June 2020).
According to Schaeffer’s Research, the golden cross on average has been a decent indicator to follow on the S&P 500:
…the S&P has averaged healthier-than-usual returns looking one, three, six, and 12 months out, per data from Schaeffer’s Senior Quantitative Analyst Rocky White. For instance, the index has averaged a three-month gain of 4.07% after a golden cross, and was higher more than three-quarters of the time. That’s compared to an average anytime three-month return of 2.12% since 1950, with a positive rate of just 65.9%.
Should long-term investors care?
Most long-term investors concerned with the accumulation of assets while utilizing a target asset allocation should not necessarily pay too much attention to any technical indicators at least from a perspective of acting upon them. Be aware of broad market moves and when a golden cross occurs, but don’t base any trades or allocations of capital based around these indicators. Leave that for the traders.
If you’re looking to get beyond just following what the Dow Jones Industrial Average does on a given day and want to get a little more advanced on following other stock market indicators, we have a list of suggested indicators here that have nothing to do with technical analysis. Most investors will be better served by becoming familiar with these more fundamental indicators rather than attempting to build trading strategies around a technical indicator.