Golden cross suggests return of the bull

IS now the time to get back into the stockmarket?

The famous ‘golden cross’, when a 50-day moving average of prices moves above a 200-day moving average, has long been one of the most closely watched technical signals by sharemarket analysts.

The signal occurred recently on the benchmark S&P/ASX 200, after end-of-financial-year buying caused the Australian market to push higher.

The last time the signal appeared was in July 2003 and local shares gained more than 120 per cent in the four years after the signal was generated.

“While there is every reason to still be cautious, this is one of the first technical signals that suggest a longer-term bull market might be returning,” says Steven Dooley from the Australian Stock Report.

But like all share market strategies, the ‘buy’ signal from this technical analysis technique needs to be monitored. For example, most technical analysts would watch carefully to ensure the moving averages do not cross back the other way – the so-called ‘dead cross’.

Dooley says an occurrence such as this would cause technical analysts to reconsider holding on to Australian shares.

“With many investors feeling wary about the sharemarket after the last two years, it might be a good idea to scale into the sharemarket, placing a certain proportion of investment capital into the market every couple of months,” says Dooley.

According to the Australian Stock Report, the golden cross can produce timely signals when the overall sharemarket trend changes from a downtrend to an uptrend, but it also can give false signals when markets are trading in a sideways manner.

There is no strict definition of a ‘golden cross’, with different analysts using various moving averages to help identify when financial instruments shift their overall general direction of markets or securities.

For example, a technical analyst might use such a technique to help determine when prices move from ‘bear markets’, when prices mostly drift lower, to ‘bull markets’, during which prices tend to move higher.

The 50-day and 200-day moving averages are long-term indicators, used to reduce the likelihood of obtaining false signals, and to lessen the frequency of transactions in and out of the market.