Market Outlook: The Golden Cross Won't Happen for Months

There is a moving average crossover system that has worked pretty well over the years. Buy when the 50-day exponentially smoothed moving average crosses above the 200-day (a golden cross) and sell when the reverse happens (a black or death cross).

We got a death cross in the S&P 500 December 2007, thank you very much.

click to enlarge

The question now is when will we see a golden cross? Of course, we cannot know that in advance but we can put a framework down to see where it might happen using non-crash conditions and non-we-just-bagged-Osama-and-solved-the-credit-crisis market melt-ups.

Using an aggressive plan for a rally over the next few months, that cross cannot happen for at least four months. And if the market putzes around for a while, that cross gets pushed out even farther into the future.

And if the market goes down to probe its old lows from November, push it out even farther - so far that we cannot even think about figuring out where. Why? Because the 50-day will get even farther below the 200-day, presenting even more ground to make up.

The point is that this system is not going to sound the "all clear" for quite some time. You may be able to pick some profits out of the market using short-term methods but long-term investors are going to have to wait.

Comments

[Hefaistos]

If there would be a rally over the next few months, that golden cross cannot happen for at least four months as you say, keeping investors out of the market. Then they will also not profit from what is often the most powerful part of the turn to the upside, which usually comes in the beginning of the upturn.

However, it's more likely that the bear market will last for another half year, or so. If we assume that the index will move more or less sideways within that time frame, the 200 MA will come down nicely towards the 50 MA, and they will both linger together at a low level after another 150-200 days. In that case, this indicator will have a quicker reaction time, bringing investors aboard earlier.

2009 Jan 16 04:07 AM

[Smarty_Pants]

Concise article and useful.

The only thing you can really hope to do now if you are a 'buy and hold' type investor is to find a solid, profitable company that has been beaten down and play the 'buy on dips, sell on rallies' sort of game in small amounts until it's time to pile in for a longer time frame.

If you restrict your dip-buying to small amounts and then sell an equal dollar amount after a rally, you can keep the excess shares and build a small position while you wait for the all clear. If the company pays a good dividend the extra shares will boost your return for the cost of commissions.

2009 Jan 16 10:50 AM