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Golden Cross Imminent On S&P 500 Index at Trader’s Narrative

One of the many technical signs that the stock market was recovering from the brutal bear market of 2008 was the “golden cross” on the S&P 500 index in late June 2009. There is a lot of granular research based on the idea of “golden crosses” - among them, the fact that when the 200 day moving average is trending higher, as it is now, the returns from the signal are much lower than if it were trending lower.

But overall, the “golden cross” acts true to its name. 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. If you had done the opposite and sold short instead, the returns would be negligible.

Right now the S&P 500 index is about to give us a similar signal. The 50 day moving average stands at 1117.52 and the 200 day moving average at 1120.93 so even if the index falls for the rest of the week, we’re still going to see a “golden cross”:

SPX golden cross Oct 2010

The Dow Jones Industrial index has already had its “golden cross” on October 1st, 2010. And the Nasdaq Composite is even closer; the 50 day moving average closed at 2287.53 today while the 200 day moving average is at 2294.59 - a difference of just 7.06 points. So we about to see a confluence of “golden crosses” within a short time for all major indexes.

The only problem is that we are seeing a whiplash in the moving average cross-overs since the market is still within a range. It was only four months ago that we had a “death cross” (early July 2010) - when the 50 day moving average fell below the 200 day moving average. Since then the market has gone in the opposite direction of the suggested signal direction and gained 13%. So much for that.

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

As well, according to a study done by Jason Goepfert, when we have similar back-to-back signals - that is reversing a “death cross” with a “golden cross” within a 3 month period. The results are lackluster, showing that within a year the S&P 500 index is slightly higher (+1.4%) with a 60% positive occurrence.

So as I take a look over the horizon based on technical and sentiment indicators, I’m ambivalent. It is difficult to come to a strong conviction based on what I’m looking at, including this imminent “golden cross”. And it does my confidence no good to continue to see Lowry Research hold steadfastly to their bullish convictions.

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One Response to “Golden Cross Imminent On S&P 500 Index”  

  1. 1 John Butters

    This only works because of the particular market pattern we have had in the past 20 years — specifically, two bear markets of approximately similar size and duration. I tested this years ago and found that it didn’t work in Japan — which has had a notably different pattern in its stock-index charts, with lots of short, quick rallies.

    Because we have had those two big bear markets, any “golden cross” system will look good because it would have kept you out of them. Today I have tested a long-only system that buys when the 50-day average crosses above a longer average, and sells when it crosses below. 150-, 200-, 250-, 300- and 500-day moving averages all do the trick, with the system outperforming buy-and-hold over the past 20 years. There is not much to choose between 200-, 250-, 300- and 500-day moving averages. (A 750-day moving average does not work at all well.)

    The problem with moving averages is that you don’t know in advance what length of average is going to be slow enough not to trade false rallies and temporary pullbacks but fast enough to get you out at the start of bear markets and in at the start of bull markets — because you don’t know how long and how sharp the rises and falls in the market are going to be. Thus, for example, a 200-day golden cross system underperforms buy-and-hold in the 20 years to October 2000 and the 20 years to October 1990.

    Note that I have been generous to the system by not using it to short. Shorting using a golden cross system has pretty much broken even over the past 20 years. Analysis is based on price data only (underperformance of the system would be larger if dividends were taken into account) for the S&P 500. Data from Tradestation.

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