Golden Cross Accomplished, Should You Buy?

The Golden Cross is a technical indicator that involves a shorter-term moving average crossing over a longer-term moving average.  In general, the Golden Cross is considered to be an indicator of a bull market, and is confirmed by higher trading volume.

On Tuesday, the highly watched S&P 500 (NYSEARCA:SPY) created a Golden Cross signal.  The index’s 50-day moving average crossed over its 200-day moving average at 1,257.  Bank of America (NYSE:BAC) analysts said that “pullbacks should prove temporary before the bull trend resumes for the 2011 highs at 1,370.”  Since 1962, the Golden Cross has formed 26 times.  Six months after the golden cross, the market was higher 81 percent of the time with an average increase of 6.6 percent.

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Kevin Pleines from Birinyi Associates explained, “We’re pretty skeptical on a lot of the aspects of technical analysis and technical signals. We took this look back, and looked at it historically, and historically it is a pretty reliable indicator. The 50-day rising is a good sign of increasing momentum, and I think 81 percent is pretty reliable.”

Strong equity performers such as Apple Inc. (NASDAQ:AAPL), Caterpillar Inc. (NYSE:CAT), Chipotle Mexican Grill Inc. (NYSE:CMG) and Netflix Inc. (NASDAQ:NFLX) have boosted the S&P 500 in recent months.  In fact, Apple recently hit another all-time high on Tuesday at $458.24.  Although the Golden Cross may be be signaling a bullish uptrend taking place, many are still skeptical of the technical indicator.

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While the Golden Cross has its merits, there are simply too many factors that could disrupt the market.  Nothing has been solved in Europe, earnings have been a disappointment in general and volume has been low.  The main catalyst for equities recently appears to be more liquidity from the Federal Reserve, which announced last week it would be keeping record low interest rates until at least late 2014.

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com