You may have heard of the ‘Golden Cross’ or its alternative the ‘Death Cross’. These are examples of predictive tools that have gained a bit of popularity. Especially with how crazy the market has behaved recently.
In a nutshell, this is how they work.
There are many signs that market analysts watch for to indicate buy and sell signals in the market. As you have probably observed, the focus is moving averages today. Moving averages are simply the average prices of the index over a fixed period of time.
The 50-day and 200-day moving averages are commonly examined for signs of the Golden or Death Cross. When the 50-day moving average falls below the 200-day moving average it’s usually referred to as the Death Cross. The opposite occurs with the Golden Cross. Additionally, there are other factors to consider as well; such as high trading volumes.
Historically, the “Death Cross signal” preceded the bear markets in 1929, 1938, 1974 and 2008. But keep in mind this signal is also a lagging indicator, meaning that the markets could already be poised to change direction before the cross occurs. And it could still reflect only short-term sentiment while new information generates another unanticipated shift.
Although there are historic occurrences of the Golden Cross and Death Cross, these are some of the more easily recognized “signs” we see feeding the Wall Street engine its steady diet of greed and fear for the herd.
We recently referenced another example, which is a perfect “exception that proves the rule”. The Inside Trader Sell/Buy Ratio published by Vickers Research.
When the ratio dips to 2.0 it’s considered ‘bullish’; when nearing 1.0, ‘very bullish’, below 1.0 is quite rare and has reached the point seen recently only 4 times since its inception in 1974. It’s statistically simple, common sense, and, visibly shows rational behavior overcoming emotions of greed and fear with useful information.
When market volatility reaches extremes, the Sell/Buy Ratio can tell us how insiders are the outcome of short-term shocks for good or ill in advance of the popular indexes. The emotions of greed and fear can give way to solid information not yet recognized by the crowd, the market and the media. It says when those who should know best, are betting serious money on the upturn and ignoring the potential of missing the bottom.
So, hang in there and try not to be startled by the “Death Cross” or other signals hovering over our heads.