Bull Market Rally: The Golden Cross shows Bullish Technical Indicators

Opinions are what drive the market. These could come from an analyst, Fund Manager, or Warren Buffet himself. Throughout 2009 we have seen are share of volatility and many are questioning, where are the markets heading next? Some say we should buy stocks other say after the recent rally investing is the wrong option and we are just playing into another “Bear Market Rally.” Others think quite the opposite that equity markets will continue to rise. Its time to take the market under a microscopic view. The S&P was trading at as low as 676 in March with the Dow Jones equally as low at 6,547. Since then the S&P has is up 46% and has risen 310 points to 986. The Dow Jones is equally impressive going up 40% a total of 2,607 points to a high of 9,154. I am a firm supporter that long-term the markets will continue to follow this ongoing trend and will head upwards. Analysts all over have become very negative especially towards equities quoting that due to the fiscal deficits our economies currently hold history has a lesson to teach us. I say to them, yes history will repeat each for the better good of the equity markets. Deficits have always been preceded by significant rises in equity markets. Look back at the markets in 1949, 1975, 1982, 1992, or 2003. Those who were not scared off by the downfalls in the markets and maintained their equity positions welcomed in the gains. To add to this we seeing the more bullish signals come out. Most importantly the Golden Cross has come into play, which has been seen or is about to take place in many indexes across the world. What is the Golden Cross? The Golden Cross is a signal of bullish markets and occurs when the short-term moving average overtakes the long-term moving average. In this case we will set the 50-day moving average has overtaken the 200-day moving average in both the Dow Jones and the S&P 500. Look at the graphs for example. See the crossover of the 50-day moving average taking over the 200-day moving average.

(The green arrow here shows the Golden Cross where the 50-Day Moving Average in Blue crosses over the 200-Day Moving Average. On the contrary this also shows the Death Cross which is the complete opposite. This can be seen by the Red arrow at the top and as a result markets collapsed)

What Does this Mean?

Historically, the Golden Cross has been a reliable sign that equities are on the rise. Just as the Death Cross has been an effective indicator of downfall. The Golden Cross is a signal of a shift of power to the bulls in the market. You can date this all the way back to 1900. Since then all the net gains in the U.S. Stock Market have occurred when the 50-day moving average is above the 200-day. To support the Golden Cross we can look at other bullish indicators. Another is that volume is rising. This shows that the bulls have support of the market. For Investors, who are long equity markets, these indicators would suggest you should continue to buy and trade stocks now as its one of the best opportunities to benefit from the recovery. Short-term traders ride the Golden Cross as long as it is in play. Warren Buffet has supported this theory advising investors to continue to trade and buy stocks despite the Dow reaching 9,000. He sees the markets continuing to strengthen and grow leading towards a rally of some sort. As a result I will end with a quote of his relating to the way history plays within trading. “Chains of habit are too light to be felt until they are too strong to be broken.”