Does A “Golden Cross” Really Mean It’s Time To Buy Stocks?
by Justin Bennett, Editor

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A “Golden Cross”…

Guest analysts of CNBC (as well as a few other well-meaning business news channels) claim this technical pattern is the real deal.  They say when these crosses occur, it’s very bullish for stocks over the next 6-8 months.

And to take it a step further, a few of these analysts say a Golden Cross is actually a ‘trigger’ to buy stocks.

Is that true?  Should you be using this technical signal as a sign to buy stocks?

I’ll answer that in a minute…

But first, let’s take a step back and cover the basics… What exactly is a Golden Cross?

This ballyhooed technical signal occurs when the 50-day moving average (dma) crosses above the 200-dma.  Now, that scenario can happen in any stock or index, but in this case we’re talking about the S&P 500.

And remember, moving averages are simply lines on a chart that average past prices.
 
For example, a 50-day moving average takes the past 50 days of closing market prices and plots them on a chart.  When a market closes trading for the day, a new average price point is plotted on the line.

Let me show you what I’m talking about...


As you can see, I’ve highlighted both the 50- and the 200-dma.  Notice how the 50-dma tracks short-term market gyrations closer than the 200-dma.  That’s because the 50-dma is tracking a smaller number of days, which makes the line more volatile.

How can you use moving averages?

These averages are widely used by market professionals.  They’re great for finding short and long-term trends in the market.  Some investors use them to help plan entry and exit points in specific stocks and ETFs.

But here’s the problem…

Moving averages are a lagging indicator.  In other words, they plot data from the past, and investors use them to make decisions in the present.  And that has the potential to create problems.

How?

If you’re using technical indicators (like moving averages) as your sole means to enter and exit stocks, you’re late to the party.  You’ll likely end up buying what the pros are selling.

What’s that mean?

As you can see in the chart above, the 50-dma is just now crossing the 200-dma… forming the “Golden Cross”.  According to many market pundits, that’s the signal to buy stocks.

But wait a second…

Do you see how the S&P 500 is already approaching the highs from last year?  If you’re buying stocks at these levels, you’re buying after the S&P 500 already made a 5% monthly jump.

That’s precisely why I don’t use the “Golden Cross” as a signal to buy stocks…

If you’re using it as a buy signal, you’re getting into the market late.  And like I said a second ago, you’ll probably end up buying what the pros (who bought weeks ago) are selling.

When should you have bought stocks?

At the beginning of the year- before the S&P 500 had its best January in over 20 years.  You know, back when I pointed out a prime buying opportunity for stocks.

Now let me be clear…

I’m still bullish on the markets for 2012.  But stocks just had a great run over the past month.  And many of them are overbought on a short-term basis.  That means we’re highly likely to see markets move lower over the next few weeks.

But once this impending pullback runs its course… then you jump back on the stock bull and ride it higher.

Until next time,

Justin Bennett

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