This "Golden" Technical Indicator is Triggering Across the Market
What is a Golden Cross?
Technical analysis is the best way for investors to determine potential trend changes in individual equities and equity markets. Though technical analysis can get complicated, simple and highly reliable signals exist for analysts who prefer “bar napkin” technical research. One such signal is the “Golden Cross”. Golden Cross refers to the phenomenon where a faster-moving average (50-day MA is most common) crosses over a slower moving average (200-day MA).
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When a Golden Cross triggers in a particular security or index, it is a signal to technical analysts that a major trend change has occurred, and the long-term trend has flipped from bearish to bullish.
Death Cross Means Caution
On the contrary, a “Death Cross” is the opposite of a Golden Cross. A Death Cross triggers when the short-term moving average (50-day MA) is above the longer-term moving average (200-day MA) and crosses below it. In March of last year, a death cross in the Invesco Nasdaq 100 ETF QQQ was an early signal that 2022 would be a rough year for bulls.
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Pros and Cons of Crosses
The Golden Cross signal has many positives, which include:
· Ease of identification: Simply bring up a daily chart of an instrument and add the 50- and 200-day MAs.
· Eliminates Guess Work: By becoming more mechanical, investors can evaluate trend changes based on fact does not bias.
· A Meaningful Signal:Because cross signals are rare, they are more meaningful.
Like all signals, crosses are not perfect. Cons include:
· Delayed Response: Since the signal is long-term, it does usually work right away.
· False Signals:Investors should be cautious in a sideways market, as the cross can produce false signals.
What are the Market and Key Industry Groups telling us?
In general, the pros outweigh the cons for investors looking for a largely reliable long-term signal. At present, some key markets and stocks are nearing signals or have already triggered them. For example, the Spdr S&P 500 ETF SPY, the most widely followed market ETF, is approaching a Golden Cross. A successful cross in this index would bode well for U.S. markets in 2023.
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Wednesday, the Vaneck Semiconductor ETF SMH triggered a Golden Cross. Semiconductors are a key industry group and often lead the market higher. Recent strides in AI are sending stocks like Nvidia NVDA higher.
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Another welcome sign is that beaten-down industries like biotech are now triggering Golden Crosses. The SPDR S&P Biotech ETF XBI is the most popular ETF tracking the space. Both large-cap and small-cap biotech stocks such as Biogen Inc BIIB and Madrigal Pharmaceuticals MDGL are participating in the rally.
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Breakdown
Golden Crosses and Death Crosses have proven to be reliable indicators in past years. Investors should understand the pros and cons of the signal and accept that it is not a panacea but rather an indication of a potential trend change. Looking at today’s market, several important industry groups have already triggered Golden Crosses – though the most significant signal has yet to trigger. Watch to see if the S&P 500 can trigger a Golden Cross to confirm that the overall market has shifted back to the bull side.
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Biogen Inc. (BIIB) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
VanEck Semiconductor ETF (SMH): ETF Research Reports
SPDR S&P Biotech ETF (XBI): ETF Research Reports
Madrigal Pharmaceuticals, Inc. (MDGL) : Free Stock Analysis Report
