Last Friday 12 June there was a golden cross on the market.
After the golden cross, the market dropped 4%. We saw the market fall for two straight days, with the ASX 200 falling below the 4000 point psychological barrier.
So, what does this mean for the market and is it a cause for concern? What is the golden cross? Why is it significant? And how can you profit from this point of view?
First of all, the golden cross is a bullish signal so you can breathe a sigh of relief. It signals that the market is likely to rise.
When the 50 day moving average breaks above the 200 day moving average - as we saw on Friday - this is referred to as the golden cross.
It signals a shift in power to the bulls and it looks like this:
The green line is the 200 day moving average line and the 50 day moving average is the red line. You can see that on Friday, the red line broke above the green line, forming the golden cross.
There are a number of things that you should check when this occurs.
The first is that volume is rising. This shows that the bulls have support. The last three weeks have seen increasing volumes and value traded so a tick to that point.
The long-term moving average (green line) becomes the next floor for the share price.
The counterpart of the golden cross is the death cross. This is where the 50 day moving average (red line) moves below the 200 day moving average (green line).
This would signal that the bears are back in control and that the market is likely to fall.
Both the golden cross and the death cross work well when share prices are moving up or down strongly but not when shares are moving sideways. If you want to try it yourself at home, on your charting tool:
Crossovers of these lines represent a buy or a sell signal.
In the case of the golden cross, as we have seen, it's a buy signal.
If you see a death cross, it's a sell signal. Check for volume and remember it doesn't work in a sideways market.
In the short-term, the market is due for a pullback which is underway at the moment. Longer term, the golden cross represents opportunity and it is something to monitor.
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Happy trading!
Julia Lee Equities Analyst Bell Direct
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