Thursday, February 2nd, 2017

S&P500 making a Golden Cross

What is a Golden Cross? It is an event when a 50 day moving average crosses 200 day moving average from underneath. It has all the bullish connotations. That means the market is bullish and that the long term outlook also has changed from sideways to a slight slant to the upside. If the market advance continues than both  50 day MA and 200 MA will keep rising side by side. Take a look on January 30 th 2012 chart below where the 50 day moving average crossed over the 200 and as a result you see the stock market up strongly. So that is the Golden cross.

It only takes market Technicians to observe these moving average cross overs on a daily basis. Most retail traders are completely oblivious of that fact and a confirming bullish signal. It does not mean that this signal will succeed in all cases but majority of times this signal has proven it’s worth to the traders in the past.

What is the opposite of Golden Cross? It’s where the 50 day MA crosses the 200 day MA from above. It implies a significant decline in prices. Take a look at August 11, 2011 prices on SPX and what followed forward was a horrendous decline in prices. This was during our debt crisis and subsequent US credit downgrade. The market fell apart and crashed to new lows and didn’t recover for the next 6 months.

Trading with moving average cross over is what some traders do on a daily , Intra day and weekly basis, and most charting programs are designed to give these signals of entry and exits. Looking backwards on charts is much easier than looking forward, than you get involved in the business of fortune telling which you know how it goes.

If this Cross over works one should expect higher prices to unfold for next few months. The economy is slowly recovering and the data is spotty in 2012. Its been 4 years since the Great Recession started and at some points fatigue sets in and people give up and they start buying things and become less fearful of events and the flow of things moves forward. It cannot be the same forever as time passes.

I am basing our outlook on the charts and what they are telling me, focusing on price action and the fundamentals that are driving these prices. The Feds have told us they will keep the interest rate low till 2014 and the European Governments have been pumping cash into the systems to keep it float. That cash will drive the asset classes higher and as evidenced by the price chart action we discussed here.

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