What’s with the Golden Cross?

Just last week saw the arrival of the ‘Golden Cross’ on the DJ30 (Dow Jones Industrial Average), and with it came a mixed bag of reactions from both bulls and bears. The ‘Golden Cross’ is a well-known forex trading strategy, actually, any instrument trading strategy that occurs when the 50-day MA crosses above the 200-day MA, conversely, when the opposite happens it’s called a ‘Death Cross’.

Since the birth of the Dow Jones Industrial Average in 1896, there have been plenty occurrences of the Golden Cross, however, the one we saw last week was the first since 2016. While the Dow did climb a huge 43.3% from the last Golden Cross, we need to ask ourselves, is it a viable trading strategy if we take trades when either the Golden Cross or Death Cross occurs.

Let’s dig a little deeper and look at the last 100 or so years of data.

Ok, so there have been a total of 81 crosses in the Dow’s history, which should be able to give us a reasonably sample size to analyse. Now we can find out of the Golden and Death crosses actually matter.

81 total occurrences 3 month return 6 month return
Average Return 2.12% 3.43%
How Many Positive 50 52
%Positive 61.73% 64.20%
Average Return when positive 7.33% 10.65%
How Many Negative 31 29
% Negative 38.27% 35.80%
Average Return when Negative -6.28% -9.51%

 

As you can see from the stats above, while there as a somewhat ok chance (60-64%) of seeing a positive return, it’s hardly a robust indicator of either strength or weakness.

A quote by Ari Wald from Oppenheimer & Co., seems to sum it up quite nicely: “All big rallies start with a golden cross, but not all golden crosses lead to a big rally.”

All in all, there isn’t much of a decent reason to rely significantly on Golden or Death Crosses. Sure, the bullish numbers are there, but it’s still not a lot to scream “buy” every time the Golden Cross occurs. If we were seeing a success rate of say, 75%, then perhaps we’d be discussing things a bit differently. Whilst these crosses are well known and quite popular as a point of discussion, their reliability as a valid trading signal leaves something to be desired.

Source: Vantage FX Blog