On a stock chart, the golden cross occurs when the 50-day MA rises sharply and crosses over the 200-day MA.
Usually, a golden cross is associated with sharp upward price movement and can be used as a buy signal in the belief that a significant uptrend will follow. Many traders swear by the efficacy of the golden cross based on their anecdotal experiences but, as regular readers will know, we believe in evidence rather than instinct-based investing, i.e.
These relatively weak findings would seem to confirm the views of value-focused investors that simply trading on the back of price movements should be treated with caution.
So while the evidence that a golden cross is truly bullish is rather mixed, Park’s work suggests that the ratio of short-term to long-term moving averages does have a meaningful amount of predictive power for future returns. The shorter, faster-moving trendline crossing above a slower and longer-trendline represents a transition from either a correction or consolidation of a stock’s price pattern. We scan the list of Golden Crosses daily, looking for stocks that are moving back in the stock market’s fast lane.
So the theory goes, a stock that’s trading at its 52-week high is likely to have recently issued good news to the market. Golden Crosses happen when a stock’s 50-day moving average crosses above its 200-day moving average.
According to Joseph Granville, a famous technician from the 1960’s (who set out 8 famous rules for trading the 200-day MA), a golden cross can only occur when both the 50-day and 200-day moving averages are rising. This found that, while using either a long-only or long-short strategy based on golden crosses could work in certain market conditions, neither produced strong results versus traditional strategies. In only 34.9% of all observations between 1950 and 2012 did those two strategies outperform a traditional buy-and-hold portfolio.
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