What is a Golden Cross?
A golden cross is a basic technical indicator that occurs in the market when the shorter-term moving average (50-day moving average) for assets rises above the longer-term average (200-day moving average). When traders find that a golden cross has occurred, they view this charting pattern as a signal, or indicator, of a strong bull market.
Many investors look at this “holy grail” charting pattern as one of the most definitive signals of a long-term bull market and therefore a strong buying signal. A golden cross is taken by most investors as an indication that a bear market is ending, and a bull market is on the rise.
While the golden cross is a popular technical indicator, there are numerous investors that question the validity of the signal because of the limited research to detail and prove its legitimacy as a trading mechanism.
There is a second, converse indicator – the death cross – which is the inverse of the golden cross. The death cross is an indicator that occurs when a security’s 50-day moving average crosses from above to below the 200-day moving average.
The Three Stages of a Golden Cross
There are three specific phases for the golden cross. The first involves the market itself, where a downward trend is occurring but is on its last legs because interest in selling declines and eventually begins to be overpowered by stronger buying interest.
The second phase involves the emergence of a new trend. It is all about the breakout of the new trend, when the short-term average crosses from below to above the long-term average, forming the golden cross.
In the final phase, the new bullish trend is prolonged, meaning gains initiated by the technical pattern are sustained. During this phase, the long-term 200-day moving average acts as a support for the market. As long as price and the 50-day moving average both remain above the 200-day moving average, the bull market is considered as remaining in effect.
How to Use the Golden Cross
Traders can utilize the golden cross to help determine good times to both enter and exit the market. The indicator can also be a tool that traders can use to help them better understand when it makes sense to sell and when it’s better for them to buy and hold.
Traders looking to buy a security will sometimes enter the market when the security’s price rises above the 200-day moving average rather than waiting for the 50-day moving average to make the crossover.
Traders who often short the market often use the golden cross as a signal that the bear market is over and it’s time to exit their short positions.
Resistance to the Golden Cross Signal
Some traders and market analysts remain resistant to using the golden cross (and the death cross) as reliable trading signals. The traders’ and analysts’ objections principally lie in the fact that the technical pattern is often a very lagging indicator. Looking at the chart above, you can see that the market bottomed out and began its move to the upside at a price level substantially lower than the point where the golden cross occurred. It indicates that the technical pattern may provide limited predictive value for traders and be more valuable as confirmation of an uptrend rather than as a trend change signal.
The golden cross can be effective as a guide to sensible entry and exit points and as an indicator of a major trend change. It also plays a significant role because it is a technical indicator used by many traders. The chart pattern is likely to attract a significant amount of buying in a market.
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