Stock Trading – Golden Cross – A Buy Signal

Ever heard that a rising tide lifts all boats, it works that way in the stock market as well. After a tumultuous 2011 and ending the year just about unchanged, the stock market is rising. What has changed to cause the market to climb, not much. Trading volume is still on the low side. There has not been a noticeable increase in buying demand, the rally has occurred because of reduced selling pressure. Investors and traders that have missed the move, watch as the market rises. These one time skeptics will take notice now that a technical indicator known as “A Golden Cross” has shown up.

What is a golden cross you might wonder, I’ll tell you. It’s when the rising 50-day moving average of the S&P 500 crosses above it’s rising 200-day moving average. This signals that bullish momentum is building, and that if you put your money to work in large cap stocks, you have a good chance to make money over the next six months or so.

Think about it, technical analysts and advisors see this indicator an advise clients to start putting money to work. Any pull back being viewed as a buying opportunity. Out of the last 10 times a golden cross has shown up on the S&P 500, 9 have seen further gains 6 months out. The one exception was in 2010-2011, the market was very volatile and the S&P 500 lost a third of a percent. Here is a chart from Stockcharts.com showing the recent golden cross.

Technical indicators are not a guarantee of what is going to happen in the market, but a guide for what is likely to happen. You can use technical indicators and compare past price behavior in an attempt to determine where prices are going to head in the future.

They are also fairly accurate. I tend to look at these indicators and try to balance them with other things affecting the world economy before I jump in. People tend to buy and sell with the herd and it usually works against them. Most people get shaken when there is a sharp drop in the stock market as happened in 2000-2002 the dot com bust and late 2007 to early 2009 our financial meltdown.

Most sell toward the low and then watch as the market rises. Then they jump in near the high, fearing missing out on all of the gains, only to watch the market retrench again. The golden cross seems to be signaling that at least in the short term, the market is headed up. The recent rally in the markets allow for a pull back without having the technical picture deteriorate. You can be cautiously optimistic for the short term but keep up with the economic events that could change the technical read.

I am personally a little nervous about the market, the market has bounced back almost 100% from it’s 2009 lows and now investors are feeling like now it’s safe to get back in. There are a lot of issues that still worry me, housing, unemployment and continuing recession over seas. Mainstream media is saying it’s time to get back in and since the individual investor is usually the last one to the party, it gives me pause. I’d be looking at booking some profits and be extra careful about buying into the exuberance in my stock trading.

As always, no matter how you trade, long or short may all of your trades be profitable!

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