S&P 500 on verge of technical buy signal, suggesting more upside.
The S&P 500 is on the verge of flashing a closely followed technical buy signal, the “golden cross”, later this week. This occurs when the 50-day moving average moves above the 200-day moving average, indicating that more upside could be in store for the S&P 500 which is up 15% from its October low. The Dow Jones Industrial Average has already flashed the golden cross signal in December and since then, the index is about flat. Meanwhile, the Nasdaq 100 is still far away from generating a golden cross.
The golden cross is one of many trading patterns that technical analysts employ to buy stocks. The opposite signal to the golden cross is the “death cross”, which is a sell signal that triggers when the 50-day moving average crosses below the 200-day moving average. The S&P 500 flashed a death cross in March of last year, and the index subsequently went on to fall another 16% at its low.
The golden cross indicator has a success rate of 64%, according to data compiled by The Chart Report. Analyst Ian McMillan looked at a total of 81 golden crosses that occurred in the Dow Jones Industrial Average dating back to its inception in 1896. He found that on average, stocks were higher three months after a golden cross 62% of the time, and higher six months after the golden cross 64% of the time.The average three-month return when stocks were higher after a golden cross was 7.33%, while the average return six months after the golden cross was 10.65%.
Ari Wald, head of technical analysis at Oppenheimer & Co., stresses the importance that moving average crossover signals are not perfect. He says that “all big rallies start with a golden cross, but not all golden crosses lead to a big rally.” The golden cross signal is one of many trading patterns that technical analysts employ to buy stocks, while the bearish death cross is in addition to many trading patterns that traders use to sell stocks.