The stock market is about to flash a widely followed technical buy signal, suggesting more upside ahead
- The stock market is set to trigger a widely followed technical buy signal on Wednesday, suggesting more upside ahead.
- The golden cross is a moving average crossover strategy employed by technical analysts to signal when to buy a security.
- The golden cross is triggered when a short-term moving average, typically the 50-day, crosses above a long-term moving average, typically the 200-day.
- The S&P 500 index is set to trigger the golden cross signal today, where as the Nasdaq 100 index already experienced a golden cross signal on June 2.
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A closely followed technical buy signal is about to be triggered in the S&P 500, suggesting there's more upside ahead for stocks.
On Wednesday, the S&P 500 is set to experience a bullish golden cross, which occurs when the shorter-term 50-day moving average crosses above the longer-term 200-day moving average. The moving average crossover signal is widely followed by technical analysts and traders.
The lagging indicator can help alert traders to securities in the stock market that are solidifying their uptrend and are likely to experience a continuation with higher stock prices.
While the S&P 500 is set to complete its golden cross on Wednesday, the Nasdaq 100 index experienced a golden cross signal on June 2. Since its golden cross, the Nasdaq 100 has risen by 8.9%.
Meanwhile, the 50-day and 200-day moving averages of the Dow Jones industrial average are still too far apart to be able to determine when a golden cross might happen for the index.
The opposite signal to the golden cross is the death cross, which is a sell signal that triggers when the 50-day moving average crosses below the 200-day moving average.
The S&P 500 experienced a death cross on March 30, amid the coronavirus-induced market sell-off. Since the death cross on March 30, the S&P 500 has risen by 23%, which highlights the fact that these buy and sell signals are lagging indicators and often throw off false signals, also known as whipsaws.
The golden cross signal is one of many trading patterns that technical analysts employ to buy stocks. Meanwhile, the bearish death cross is in addition to many trading patterns that traders use to sell stocks.
Data compiled by The Chart Report suggests that the golden cross has a success rate of 60% to 64%. Ian McMillan analyzed a total of 81 golden crosses that occurred in the Dow Jones industrial average dating back to its inception in 1896.
The analysis found that on average, stocks were higher three months after a golden cross 61.7% of the time, and higher six months after the golden cross 64.2% of the time.
The average three-month return when stocks were higher after a golden cross was 7.33%, while the average return six months after the golden cross was 10.65%.
Stressing the importance that moving average crossover signals are not perfect, Ari Wald, head of technical analysis at Oppenheimer & Co., said to The Chart Report, "All big rallies start with a golden cross, but not all golden crosses lead to a big rally."