The Dow Jones Industrial Average is about to enjoy a "golden cross", when the 50-day average crosses above the 200-day average. We've looked at this in various markets over the years, typically with the conclusion that it's mostly useless.
The wrinkle being discussed this time is that the 200-day average is rising, so that makes it different from the last cross in December. That one failed miserably, but the 200-day average was sloping down at the time.
Using the S&P 500, let's go back and see if the slope of the 200-day average made any difference. We will consider the 200-day average to be rising if it's higher than it was 5 days ago and falling if it's lower than 5 days ago.
First, returns when there was a Golden Cross with a rising 200-day average:
Now, with a falling 200-day average:
Per usual, conventional wisdom was wrong, or at least horribly inconsistent. Longer-term returns were actually better after a Golden Cross when the 200-day average was falling than when it was rising.
The post titled Golden Cross With A Rising 200-Day Average was originally published as on SentimenTrader.com on 2016-04-19.
At SentimenTrader.com, our service is not focused on market timing per se, but rather risk management.
That may be a distinction without a difference, but it's how we approach the markets. We study signs that suggest it is time to raise or lower market exposure as a function of risk relative to probable reward. It is all about risk-adjusted expectations given existing evidence. Learn more about our service , research, models and indicators.
Follow us on Twitter for up to the minute analysis of market action.