To understand the golden cross, we need to first get a sense of moving averages and, particularly, the short-term, and the longer-term moving averages. Moving averages are created to filter out the “noise” by eliminating day-to-day fluctuations and creating trends, which also indicate the state of the financial activity. The short-moving average is designed to analyze the present market trends, whereas the longer-term moving average, allows the analyst to observe market activity over a long period of time. Depending on the market activity, both moving averages create widely different trends when represented on a chart.
When graphed together, these averages can result in crossovers such as the golden cross, and the death cross. The golden cross is the meeting point between the two moving averages where the short-term moving average breaks above the long-term moving average. This indicates a change in market activity which brings good news for the businesses, since the current market activity is greater than the previous activity. The market momentum, as indicated by the golden cross, has shifted up. In most – but not all – circumstances, the short-term moving average is of 50 days, while the longer-term moving average is of 200 days.
Many analysts rejoice when they observe the golden cross, since it is an indicator of a bullish market. This means that the current market conditions are defined by high trading volumes. Based on this indication, and with the help of other statistics, analysts can then predict an upsurge in the market activity. In stock market, while observing the short and long-term moving averages of the stock, analysts can determine that the market activity is now in favor of the stock.
However, it is imperative to note that the golden cross should never be seen as the sole indicator of market condition. In fact, it must always be used in addition with other, similar, indicators for best results. The key to the success of the golden cross is its simplicity. But the very same simplicity can spell doom for your investments if relied upon too heavily.
Although seemingly similar-sounding indicators, the golden cross, and the death cross vary widely in their implications. In fact, they are exact opposites. While, on one hand, the golden cross is an indicator of a healthy market activity, the death cross indicates downturn. However, they are also similar in that both of these indicators occur at the intersection of short and long-term moving averages, and can be used to predict the market situation in the future.
Financial education is so important, but barely taught at all in our schools. Having resources online is great, but not if they are inaccessible to so many. Thanks 508!