The Golden Cross Pattern: A Vital Tool in Your Trading Kit

Whomever named the standard candlestick patterns must have had a taste for the morbid and the medieval. Thus, we find ourselves running into patterns like Three Black Crows, Abandoned Baby, and Hanging Man. Two of the most respected formations in the book take this predilection for the dark and elevate it to the level of religious zealotry: the Golden Cross and the Death Cross. 

When traders see a Golden Cross, they tend to stop and take notice, not so much out of fear of Heaven as out of the desire to increase their bank balances. A Golden Cross tells traders that momentum for their security is bullish, which means that prices are accelerating on an upwards trajectory, increasing the likelihood that this trend will guide prices into the foreseeable future. This could occur at a time when prices are already going up, indicating we should expect more of the same, or at a time when prices are sliding downwards, alerting us to a potential turnaround.  

One common scenario would, firstly, exhibit dropping prices finding their bottom. Following this, the shorter of two moving averages for the security crosses above the longer moving average. This confirms what we already see in prices – that the downtrend has petered out. Finally, after the crossover occurs, we find that prices continue their upward journey. Once this happens, traders’ moods turn decidedly bullish on the security. 

This could occur on larger time scales, for instance using the 50-day and 200-day moving averages for the asset. Later, we’ll see that the manifestation of a Golden Cross of this kind in the S&P 500 market index is valued very highly by traders, who like to use as a long-term buy signal. Indeed, when the time frame being used is more expansive, we often find that the ensuing breakout lasts longer. As to the reliability of such a signal, history tells us that 71% of the Golden Crosses that have formed in this index since 1930 paved the way to higher prices one year later.  

But Golden Crosses also form on shorter time scales, lending them applicability in the field of day trading. In this case, moving averages could be calculated for five- and 15-minute-long periods. When the five-minute moving average crosses above the 15-minute moving average, a short-term buy signal is generated. On all time scales, traders normally look for confirmation from other indicators before going ahead with the bullish trade. 

Get comfortable with us for another minute or two as we give you the lowdown on moving averages, explaining why their crossovers take on such significance in technical analysts’ minds.  

What is a Golden Cross Pattern?

Behold the Golden Cross! It may not look as dramatic as it sounds, but the sight of it does trigger a rush of blood to the heads of online traders. Firstly focusing on the price action evident in the series of green and red candlesticks: Prices bottomed out on the left-hand side of the chart with the long red candle that took them down to the level of 112.00. Following this, we see the asset took off on a sustained rally that was underway long before the Golden Cross even made its appearance. 

Now turning to the 50-day moving average (MA) signified by the blue line: How is this line calculated? In the case of a Simple Moving Average, the answer is, indeed, simple. For every new trading session, add up the last 50 closing prices for the security and divide the answer by 50. This calculation is renewed for each new day, creating a constantly updated price average for that interval, thus making it a “moving” average. When present prices are above the MA, it shows they are in an uptrend. If they are below the MA, they’re in a downtrend. In addition, when the MA itself is climbing higher, we know prices are trending bullishly, and vice versa when you see the MA trailing groundward. 

The 200-day MA drawn in black gives you the average price for the security over a period going back 200 days. Thus, when the 50-day MA crosses above the 200-day MA, it indicates that the trend over the more recent period is more bullish than the longer-term one. In other words, prices are rising more quickly recently than they were beforehand. What we get from this is a gauge of momentum for the security: specifically, that upward momentum is on. This means we know, not just that prices are moving upwards, but that they are accelerating in their upwards movement. Why does this matter to us? Only because it’s an indication they are likely to keep rising for a longer period of time.  

If you know your train is, not only moving eastwards, but accelerating in an eastward direction, you can rest assured it won’t be heading westward any time soon. Even in the event that the engine is turned off, the train’s inertia will carry it a substantial distance ahead before it starts to slow down. This is why traders’ eyebrows rise when a Golden Cross pattern appears before them. As to the dreaded Death Cross, it’s just the opposite of the Golden Cross – occurring when the shorter-term MA crosses below the longer-term one, generating a sell signal for the security. 

The Golden Cross of February 3, 2023 

At the close of trading on Thursday, February 2nd, 2023, the 50-day MA for the S&P 500 clocked in at 3,953.61 – a little bit higher than the 200-day MA, which was at 3,951.58. This hadn’t happened since July 2020, at which time a long-term bull run was heralded. In that case, the index went on to gain over 50% in the space of eighteen months, touching the peak of 4,800 in January of 2022. 

Back to 2023 and the reappearance of the oracle: The conviction spread among traders that the S&P’s late rally was the beginning of something much greater. Traders felt this was confirmed by the fact that the Dow Jones Industrial Average did the same thing a few weeks before. As a matter of fact, the S&P did go on from the level of 3970.15 on the final day of February to register successive monthly gains until July 31st, when it held at 4588.96. 

There have been times when a Golden Cross pattern appeared in the S&P 500 and no rally in prices followed. For instance, one was formed in 1986, not long before the massive stock market crash that occurred on “Black Monday”. Going ahead a bit to 1999, another Golden Cross led traders astray before the infamous bursting of the “dotcom bubble”. And then, at the beginning of April 2019, a Golden Cross manifested on the S&P, only to lead on to a year of bearishness for stocks. 

When Golden Crosses Fall Short

Golden Crosses are a lagging indicator – meaning that they are based on past prices. When the MAs being used are spacious ones – say, the 50-day and 200-day MAs – then the lag between the indicator and present prices starts to increase. Thus, it tends to happen that a rapidly moving or volatile market renders the Golden Cross inapplicable. If used, it would signal the moment for a buy deal too late. Plus, when the market is turbulent or moving in a sideways direction, it can even happen that false Golden Crosses appear, confounding the sincere efforts of online traders. 

When choosing time periods for your MAs, there is no single answer as to what works the best. Technical analysts say that it ultimately depends on the market conditions of the moment. Usually, technical traders don’t follow the Golden Cross with blind devotion. They look to trading volume to confirm that more interest in the asset is actually building up behind the scenes. In the case of a Golden Cross pattern on the S&P, they also might check whether the rally in prices is being driven by a broad range of stocks, or only a few of them. In the latter case, the signal would be less reliable. 

Wrapping Things Up 

Golden Crosses are definitely a valuable tool to keep in your online trading kit, especially since they aren’t very complicated to use and boast a solid hit rate. Still, be careful that your dedication to them doesn’t border on the religious. Like any indicator, they are only a clue as to what might happen down the line, based on past price behavior. The markets may very well behave in totally novel ways today or tomorrow, turning your Golden Cross into nothing but a relic. 

“All the big rallies start with a Golden Cross”, explains Oppenheimer’s Ari Wald, “but not all Golden Crosses lead to a big rally. It’s just one piece of the puzzle”.