When is a Golden Cross, not a Golden Cross?

There’s been a lot of speculation that the S&P500 could well be set for a sharp move higher after a long term trend indicator gave a strongly bullish signal.

There’s been a lot of speculation that the S&P500 could well be set for a sharp move higher after a long term trend indicator gave a strongly bullish signal.

The Golden Cross is a technical analysis signal where the 50 day moving average crosses above the longer term 200 day moving average, and can be interpreted as a long term bullish indicator.

In 2012 the crossing of these two averages heralded a 3 year long term bull trend which since mid-2015 has struggled to kick on further.

This indicator is not a panacea though, and has been less than reliable in the past as can be seen from the false signal that was given at the end of last year when we also posted what the market perceived was another Golden Cross.

This is where it is important to understand why the Golden Cross in 2012 worked and the one in 2015 did not.

Quite simply in 2012 the cross over worked because both M/A’s were beginning to trend higher, along with a price action triangle breakout, which suggested that momentum was in its favour.

In 2015 this was clearly not the case as the 200 day MA was trending lower, and is still doing so today.

This suggests that the Golden Cross seen in the past few days has a higher probability of failure in the same way as the one in December last year.

Moving averages are supplementary indicators and should not be used in isolation which means that traders should be cautious about this Golden Cross in the same way as the one in December.

There is also the small fact that a few days ago the price action posted a bearish reversal day.

Quite simply to stand a higher chance of success both M/A’s should ideally be trending higher, and there should be confirmation from other indicators.

That is not the case here so “buyer beware” of another bull trap.

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