The first time I used the golden cross and death cross as part of my investment toolbox I was trying to anticipate the market movements through technical analysis. These tools became absolutely essential to my technical analysis equation of evaluating the market situation. I hope the following will help you utilize the golden cross and death cross as well.
In the world of investing, navigating the market is much like sailing across an expansive and often treacherous ocean. It is filled with highs and lows, waves of information, and undercurrents of complex trends. Like seasoned sailors, successful investors do not sail blindly; they leverage robust tools and strategies to help them ride the stormy seas.
Among these tools are the golden cross and death cross—two intriguing terms that may sound like plot points from a thrilling pirate novel but are, in fact, powerful techniques employed in technical stock market analysis. Let us have a closer look these tools and explore how you can utilize them in your investment journey.
The golden cross and death cross are indicators used in technical analysis to anticipate if stocks will rise or fall.
Learn more about investing with technical analysis.
The golden cross and death cross
The golden cross and death cross, as dramatic as they sound, are simply specific types of signals generated by moving averages that can help investors anticipate significant price movements.
The golden cross
This is the beacon of positivity, a ‘happy signal’. A golden cross occurs when a short-term moving average, like the 50-day moving average, crosses above a rising long-term moving average, like the 200-day moving average. Picture yourself on a lush hiking trail, and suddenly, a radiant signpost emerges from the bushes declaring, “Bullish Territory Ahead!”. In simpler words, a golden cross might be an indication to buy, as it signals that the prices could be heading upwards.
The death cross
In contrast, a death cross is a foreboding, ‘not-so-happy’ signal. It transpires when the short-term moving average crosses below a declining long-term moving average. In our hiking analogy, imagine stumbling upon a sign that warns, “Caution: Bearish Territory Ahead!”. This could be a signal to sell, as the prices might be about to take a nosedive.
Neutral signal
Mind you that if a short-term moving average crosses through a long-term moving average that is flat, neither going up nor down, then it does not confirm any trends.
I have read recommendations to simply buy when the short-term average is above the long-term average, and sell when it is below, but I have found this approach to be unreliable and would caution against it.
Analyzing the stock market with the crosses
So how does one analyze stocks using these mystical crosses? Let us have a closer look.
Understanding the trend
The first step is to understand the concept of moving averages. They help identify trends by smoothing out price fluctuations, providing a clearer view of the stock’s overall direction over a specific time frame. Many investors find the 50-day (short-term) and the 200-day (long-term) moving averages particularly useful. You can also use three moving averages in your analysis. If you are primarily trading stocks, I would consider the 20-, 50-, and 200-day moving averages.
Observing the cross
Next, carefully observe the movement of these two averages. A crossover, where the short-term average moves above or below the long-term average, indicates a potential change in trend. This is the golden cross or the death cross respectively.
Making Your Move
A golden cross suggests a bull market on the horizon – a potential ‘buy’ signal. Conversely, a death cross can indicate a bear market, which might be a good time to sell.
A word of caution
The moving averages are based on previous stock chart movements over time. If a market crash occurs too quickly, such as Black Monday in 1987, you will not see a death cross in relation to the event. However, in cases where the market crashes over a longer period such as in 2008/09, then the death cross will appear.
Final thoughts on golden crosses and death crosses
Remember, while the golden cross and death cross can be useful tools in predicting price movements, they are not infallible. Like any investment strategy, they should be used in conjunction with other indicators. It is this combination that builds a balanced and successful investment approach.
The intriguing world of the golden cross and death cross is a testament to the complexities and the fascinating dynamics of stock market analysis. Like signposts on a hiking trail, they can guide you, but the path you choose is ultimately up to you. Happy investing!
