In a previous study I demonstrated that “death crosses” aren’t consistently bearish for the stock market. In fact, death crosses are more often a bullish sign than a bearish sign.
*A “death cross” = when the stock market’s 50 daily moving average crosses below its 200 daily moving average.
But what about the “Golden Cross”? The “golden cross” occurs when the 50 daily moving average rises above the 200 daily moving average. This is commonly seen as a bullish trend following indicator. Is this a medium-long term bullish sign for the stock market?
Here are the Golden’s Cross’ historical cases.
The stock market made a medium term decline (final wave of this “significant correction) after the “Golden Cross” occurred.
The S&P began a “small correction” 2 months after this Golden Cross occurred.
The S&P continued to rally after this Golden Cross occurred. The S&P did not fall back to this level during the “significant correction” in 2010.
The S&P rallied for another year after this Golden Cross occurred. The next bear market began in October 2007.
This occurred after the S&P made a “significant correction”. The stock market rallied throughout the next year.
This occurred during the middle of a “significant correction”. The S&P fell a little over the next few months, but then rallied throughout 1995.
This occurred after the S&P made a “significant correction”. The S&P continued to swing higher after this Golden Cross occurred.
As you can see, a Golden Cross is not a particularly useful short term or medium term signal. Sometimes the stock market rises over the next few months when a Golden Cross occurs. Sometimes the stock market falls over the next few months when a Golden Cross occurs.
HOWEVER, it is very useful as a long term signal for bear market bottoms.
Golden crosses don’t exist during bear markets. This means that when a Golden Cross occurs during a bear market, the bear market has probably already ended (i.e. the rally isn’t just a bear market rally – it’s the start of a new bull market).
Here are historical bear market examples.
This is the 2007-2009 bear market. Notice how the Golden Cross didn’t occur until the bear market was already over. It confirmed the bear market bottom.
This is the 2000-2002 bear market. Notice how the Golden Cross confirmed the bear market’s bottom.
This is the 1973-1974 bear market. Notice how the Golden Cross occurred AFTER the S&P 500’s bear market was already over.
This is the 1968-1970 bear market. Notice how the Golden Cross occurred AFTER the bear market was already over.
I’m going to add this to the Medium-Long Term Model
I’m going to add this to the long term component of the Medium-Long Term Model.
I mentioned that the model has stop loss indicators for bull markets (in case the model fails to predict a bear market).
This Golden Cross will be a stop loss indicator for bear markets (in case a bear market ends before the model predicts the bottom). The Model has never failed to predict a bear market bottom before, but it’ always best to add contingencies.
It’s important to have long term stop loss indicators. That way you don’t stick with the model’s exact target until you make a big mistake. Here’s a very simple example (one that the model doesn’t use). Let’s assume that the model states “the S&P 500’s weekly RSI much reach 25 in a bear market”. But what happens if the bear market ends when weekly reaches 27? How do I prevent myself from being stubborn and missing out on the whole bull market?
The Golden Cross does this. It confirms that my model’s target won’t be met (because the bear market is already over), thereby allowing me to go long during the new bull market at a decent price.
Remember, all models should have stop losses. These stop losses = “how do you know if you’re wrong”.