Monday, January 16, 2012

Golden Cross

 Subscribe in a reader Delicious Bookmark this on Delicious

One trigger where we generally see money move in and out of the market is based on the “golden cross,” which identifies when the 50-day short-term average crosses above the 200-day long-term average of a stock or index. Currently, the S&P 500 ($SPX) is closing in on that happening within a few weeks.

Granted it is just one indicator and one should not solely rely on just one.
But there’s a good historical reason traders use this mechanical trigger. Over the past 20 years, the 50-day line crossing above the 200-day average of the S&P 500 Index resulted in surprisingly bullish data. Of the nine times this event has occurred in those 20 years, the S&P 500 averaged a 23 percent increase before the market reversed.  According to John Spinello, chief technical strategist at Jefferies Group, if you bought the S&P 500 index based on the eight “golden cross” events in the past 20 years and held until there was a “death cross”, you would have a 191% return.

It is important to remember that these patterns hold true on average - not every single time.As with  seasonality or presidential cycles, they hold powerful sway over the market but are never to be considered as a dictatorial mandate.

Chris Johnson, Johnson Research Group CEO, discusses how investors should play the "golden cross." He highlights which sectors would benefit from such a formation.

No comments: