Technical analysts have a flair for the dramatic. That’s because they live for the moments when key levels are eclipsed, and when “technically significant” markers are hit. One such dramatic breach occurred recently on the S&P 500 Index ($SPX), and it just might represent a golden opportunity for the bulls.
In late January, the broad measure of the domestic market experienced a “Golden Cross.” This is the term technical analysts have given to a time when the short-term bullish trend in the market moves up through the long-term bullish trend.
More specifically, the Golden Cross is when an index’s short-term, 50-day moving average breaks above its long-term, 200-day moving average.
The “cross” that takes place is between the 50-day and 200-day moving averages (seen here when the blue line moves above the red line), and the good thing for traders is that the Golden Cross statistically is the harbinger of more upside to come.
If we examine the predictive abilities of the Golden Cross since 1975, we see that the S&P 500 has been higher a year after the appearance of a golden cross 94% of the time, according to Schaeffer’s Investment Research. Even more encouraging is that the average gain was nearly 13%. The Golden Cross surge also holds true for the tech-heavy NASDAQ Composite, which has risen 91% of the time following the indicator’s appearance.
Of course, the Golden Cross alone doesn’t mean that stocks are destined to surge. Exogenous factors such as the omnipresent uncertainty over Europe’s debt situation could tarnish the Golden Cross’s prescience.
Still, the presence of the Golden Cross in a year that’s started out with an unabashed buying frenzy is indeed a bullish omen for the remainder of the year—and that’s something every trader should take note of.