If you are scour­ing around the finan­cial inter­nets (sic), you are prob­a­bly hear­ing much about the "golden cross" that just occurred in the S&P 500. This is sim­ply when the 50 day mov­ing aver­age crosses above the 200 day mov­ing aver­age. Like all things tech­ni­cal analy­sis, it is some­thing that takes on more sig­nif­i­cance the more peo­ple in gen­eral use tech­ni­cal analy­sis. As an exam­ple of this, I like to use the exam­ple of the sweater sales­man in Miami. If said sales­man saw a pat­tern where sweater sales rose each time the tem­per­a­ture went over 80 degrees he would scratch his head at this ran­dom pat­tern. How­ever, being a busi­ness per­son you can bet he would stock up on sweaters when he saw the fore­cast was por­tend­ing tem­per­a­tures over 80 degrees. At its most basic, that is how I read tech­ni­cal analy­sis. There is no real sig­nif­i­cance to the 200 day mov­ing aver­age (ver­sus the 161 mov­ing aver­age or the 134 mov­ing aver­age), other than the fact the crowd gives it sig­nif­i­cance. And when so much money fol­lows spe­cific pat­terns, it tends to self rein­force.

Along those lines a pop­u­lar broad tech­ni­cal tool is to get bull­ish when the 50 day moves over the 200 day. It can be fun­da­men­tally inter­preted by say­ing recent price action is stronger than older price action – which in and of itself says noth­ing other than recent price action has been good RELATIVE to action 4–5-6 months ago. That doesn't mean the next 2 months or 4 months will be bet­ter, unless you believe physics plays a role in mar­kets – i.e. a body in motion tends to stay in motion.

We are now see­ing a golden cross in the S&P 500 as the chart below shows:

One can see that the last 2 occur­rences, marked with the blue arrows led to sig­nif­i­cant ral­lies over the com­ing 4–6 months – albeit not nec­es­sar­ily immediately.

Last evening Cramer had an even handed assess­ment of the sig­nif­i­cance of the golden cross, and points out how it has become more accu­rate of a tool in more recent years. In my opin­ion part of that has to do with the fact I think far more peo­ple have come onto the tech­ni­cal analy­sis train in the 70s, 80s, 90s, etc then prior to that, when per­haps a small cult was even think­ing about such things.

7 minute video – email read­ers will need to come to site to view.

Also, some data points 1930 for­ward from Ritholtz here show­ing golden crosses have worked far bet­ter 1960s for­ward when the 50 day is cross­ing a FALLING 200 day (as is the case now) and far bet­ter 1980s for­ward when the 50 day is cross­ing a RISING 200 day.

As an aside, "Death Crosses" (in which the inverse hap­pens – the 50 day crosses below the 200 day) are much less use­ful as an indi­ca­tor in my opin­ion. But that is just from 'feel' and I don't have the data in front of me.

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Any secu­ri­ties men­tioned on this page are not held by the author in his per­sonal port­fo­lio. Secu­ri­ties men­tioned may or may not be held by the author in the mutual fund he man­ages, the Pal­adin Long Short Fund (PALFX). For a list of the afore­men­tioned fund's hold­ings at the end of the prior quar­ter, visit the Pal­adin Funds web­site at http://www.paladinfunds.com/holdings/blog

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