Goldman Sachs’s (GS) golden cross

The bullish “golden cross” pattern that surfaced in Goldman Sachs’s stock chart Wednesday could bode rather well for investors in the coming months, especially since the stock also appears to have reversed a five-year trend of underperformance against the S&P 500 at the same time.

A “golden cross” refers to when a stock’s 50-day moving average rises above the 200-day moving average. Many chart watchers say these bullish moving-average crossovers mark the spot that a short-term rally transitions to a long-term uptrend.

Although that’s the first golden cross in nearly two years, they aren’t too uncommon, as there have been seven previous appearances over the past 10 years. What’s relatively rare, however, is when they actually work as buy signals.

Of the previous seven, only the ones that appeared in September 2012, May 2009 and August 2005 provided good entry points to ride sustainable longer-term rallies. Those golden crosses preceded gains of 37% over five months, 38% over five months and 46% over eight months, respectively, before the stock started corrections of at least 10%.

A common theme of those three golden crosses were that Goldman’s shares were simultaneously ending long-term relative-performance downtrends when compared with the S&P 500.

And currently, RBC Capital technical analyst said he sees a “potential long-term trend reversal developing” in Goldmans’ stock relative to the S&P 500.

S&P 500 just formed a "golden cross"

The S&P 500 just formed a "golden cross," implying a trend change for the better. But other indicators still point downward.

The Standard & Poor's 500 just gave a signal that usually indicates a rising trend is in place that typically lasts for months, not just days.

The indicator, dubbed the "golden cross," occurs when the 50-day moving average of the index rises above the 200-day moving average. The crossover of those moving averages typically indicates the market's medium-term trend has shifted to the upside, rather than being just a short-term blip.

But what makes me very leery of the current golden cross is the proximity of serious chart resistance. Trading from January through July 2007 left a huge zone of overhead supply that already served to halt rallies in October and late November.

And even if the S&P 500 can move through the 1265-1290 zone (it traded at 1281 Thursday), the challenges above in the 1350 area are even stronger.

Adding to my apprehension is the fact that of all the major stock-market indexes, only the Dow Jones Industrial Average joined the S&P 500 with a respective signal. Neither Nasdaq Composite nor the small-capitalization Russell 2000 did. And nor did the equal-weighted version of the S&P 500 (the regular S&P 500 is capitalization-weighted and heavily influenced by larger stocks).

So far, the market is not speaking with a unified voice.

Another troubling factor is the strength of the dollar. Specifically, the U.S. Dollar Index, a basket of six currencies and heavily weighted in the euro, is near a 52-week high. Given that stocks—representing aggressive or risk assets—and the dollar—representing defensive, or safety assets—currently have an inverse relationship, it does present a dilemma for stock bulls.

Golden Cross May Indicate Dollar Index Gain

(Bloomberg) -- A “golden cross” of two moving price averages of the Dollar Index for the first time in 18 months indicates that the rally in the greenback may accelerate, Auerbach Grayson & Co. and Brown Brothers Harriman & Co. say.

The index, used by IntercontinentalExchange Inc. to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, may rise to 84, the highest level since May, in three months as the 50-day moving average crossed above the 200-day mean, said Richard Ross, a global technical strategist at Auerbach in New York.

The gauge rallied 13 percent to the highest level in two and half years the last time it built a “golden cross” in September 2008, he said. “This time is very similar,” said Ross. “It has built a very nice base from healthy consolidation and now it’s time to climb up.”

The Dollar Index has gained 3.6 percent this year to 80.64 at 12:21 p.m. in New York. The measure slumped 4.2 percent last year.

It’s a “good sign” for medium-term investors in addition to the dollar’s long-term bullish trend, said Marc Chandler, global head of currency strategy at Brown Brothers in New York. “This is important for all fund managers as they may want to leave more money at home this year.”

The index could meet resistance at the 82 level, as it nears the 50 percent Fibonacci retracement of its move from the 2009 high of 89.11 to a low of 74.27 in the same year, Ross said. Fibonacci charts are based on the theory that securities tend to rise or fall by specific percentages after reaching a new high or low.

A moving average is a technical indicator that displays the mean value of a security over a certain time period. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

Golden cross : A technical phenomenon may have fired off a buy signal for stocks

EVEN THE MOST SEASONED market professionals secretly want one special indicator that tells them what to do.

For many, the "golden cross," which ties two key moving averages together, is as close as they dare to get. Last month, the golden cross fired off a buy signal on the Nasdaq, suggesting it was time to get long and stay long in the stock market.

A golden cross occurs when the 50-day moving average crosses above the 200-day moving average. And while this analysis is typically applied to the Standard & Poor's 500 or, to a lesser degree, the Dow Jones Industrial Average, it is finding a home with other indexes and even other asset classes.
The question now is whether investors will treat it as the golden goose, a legendary creature that laid one golden egg each day and was killed by its impatient owner, who wanted all the gold immediately.

Theoretically, the golden cross tells us that the long-term trend has turned from bear to bull. Because it uses two averages the signal happens much sooner than using the long-term average -- the 200-day -- alone. Indeed, its inverse for signaling the turn from bull to bear, called the black, or death cross, did a good job warning about the impending market decline in December 2007.

With talk from Wall Street to the Fed saying the recession will end within six months, it seems that the golden cross has merit. After all, the stock market is looking many months down the road, so a bullish signal now matches the recession-ending chatter.

But are investors looking for the easy gold now from their golden goose by buying after such a huge advance has already been made? That would put them at risk for a big correction and kill the goose with losses.

Or are they willing to consider that the Nasdaq may need a bit of rest after a 46% gain from March? In other words, are they willing to have the patience the golden goose's owner did not have to take this market one day at a time?

Let's see how the Nasdaq fared using the golden cross and its black counterpart.

As mentioned, the black cross signal was clearly a good one in December 2007. So was the golden cross that fired in May 2003 to kick off a multiyear rally. However, between these two signals, investors suffered a serious false sell signal in the May 2005 Nasdaq (see Chart 1). They suffered another false sell signal in June 2006 so it appears that this system is not very reliable.

But there is one modification we can make -- changing from simple to exponentially smoothed averages. Exponentially smoothed averages assign more weight to newer prices, and less to older prices, and can be found on most free charting services on the Web.

This revised golden cross signal fired on the Nasdaq Tuesday. The real question is whether this modification yields any better results -- unfortunately, the answer is no. The same whipsaws that occurred for the simple moving average pair occurred with the exponentially smoothed pair.

Based on this result alone, it seems as if the golden cross is not much of an indicator. Why then do so many people look for it? The answer may be that the Nasdaq is simply the wrong market benchmark to use. When we switch analysis to the S&P 500 we'll find that there have been no golden or black cross failures since 1998 when the market was rocked by the Asian currency crisis.

There has also been no golden cross signal in today's market (see Chart 2).

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