Monday, January 16, 2012

Golden Cross

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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.




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