by Jeff Drake
7. February 2012 11:37
You may have been hearing about the Golden Cross the last couple of days. For those that don’t know, the Golden Cross is simply the crossing of a shorter term moving average through a longer term moving average. Lately, the Golden Cross has been in the news due to the fact that the S&P 500’s 50 Day Moving Average has crossed through the indexes 200 Day Moving Average.
Historically, a cross to the upside has been a very good bullish sign. Since 1962, there have been 26 crossed to the upside. The market made an average gain of over 4% in the following three months and it posted a positive gain 73% of the time. Take a look at the Golden Cross that occurred in the fourth quarter of 2010. After a brief pullback, the market rallied throughout the rest of the year and into the first quarter of 2011.
However, this time it’s worth considering the rest of the chart before getting too bullish. The major indexes have been very strong for a few months now, and the market appears to be overbought in the short to medium term.
It’s also worth noting that all of the major indexes are currently near resistance. On the S&P 500 chart, the resistance is more of a zone than a level. The chart below shows that this zone has a range of 30 points from 1340 level to 1370.
It’s hard to argue with the statistics associated with the S&P 500’s Golden Cross. But we are currently faced with a couple of obstacles that could impede a short term continuation move, and the indexes reaction in the next week or so could help us discern whether these obstacles make this one of the few times when the Golden Cross turns out to be fool’s gold.