Since Apple, Inc. (AAPL) met its death cross (definition below) in December last year the stock has fallen over 21%, from $545.00 to its current $450.00 price level. When it occurred with Apple, this technical trend signal was so widely publicized that the media seems to now have a deathly (pun intended) fear of the event, regardless of its validity.
Before we look at gold and its impending death cross, the purpose of this article, let's first define what a death cross is:
A death cross occurs when an equity's 50-day simple moving average (SMA) (short-term movement) falls below its 200-day SMA (long-term movement). This is widely known in the technical trading world as a bearish indicator, telling traders that price movement is reversing trend to the downside. Naturally, this is generally a strong sell signal. Here is a graphical example of the death cross, illustrated by the graph for Apple, Inc. as discussed above.
As you can see, and as mentioned above, when Apple, Inc.'s 50-day SMA crossed below its 200-day SMA the stock was trading around $545.00. Since the cross, a bearish indicator, the stock has declined over 21%, to its current $450.00 price level.
Now, for the further uses of this article let's look at a golden cross, the opposite of a death cross:
A golden cross occurs when an equity's 50-day SMA rises above its 200-day SMA. This is generally, of course, a bullish indicator, telling investors to buy as the equity appears to be reversing trend to the upside. Below is an example of the golden cross, illustrated by the graph for Google, Inc. (GOOG).
As shown by the graph above, Google experienced a golden cross in August last year, when the stock was trading in the $675.00 range. Google has since climbed 18.5% to its current $800.00 price level.
Seems easy enough right? Buy at the golden cross, sell at the death cross. I'm an investing genius.
Well, today gold and the gold ETF, SPDR Gold Shares (GLD) approached their respective death crosses and investors (or at least the media) seem to be, well, freaking out.
But are the death and golden crosses accurate and appropriate indicators when it comes to the precious metal? According to history, the answer is no.
Here's a one year look at SPDR Gold Shares with 50-day SMA, 200-day SMA, and Bollinger bands overlaid on the graph:
So, according to our above theory to buy at the golden cross and sell at the death cross, let's try a couple examples.
Let's say, using our theory, we sold short when the death cross occurred in April, 2012 and then closed the short position when the golden cross occurred in September, 2012. If we did this we would have sold at $160.00 and bought at $172.00, a net loss of 7.5%.
Well, our theory didn't work too well on that example. How about on the long side?
Let's, again, use our above theory and buy at SPDR Gold Shares' golden cross in September, 2012 and sell at the death cross, which appears to have occurred today, February 20, 2013. If we did this we would have bought at $172.00 and sold today at $151.00, a net loss of 13.9%.
It looks like, when it comes to gold, the theory of buying at the golden cross and selling at the death cross is a bust. In fact, if we had followed the exact opposite of our above strategy we would have yielded a five month positive return of 7.5%, followed by a five month positive return of 13.9%.
In summary, as far as gold goes, as illustrated above, it appears that the strategy of buying at the golden cross and selling at the death cross is a very ill advised strategy. In fact, the exact opposite strategy, to buy at the death cross and sell at the golden cross appears to be a wiser choice.
Much is to be determined with regard to gold's price movement in the coming sessions and, don't get me wrong, I would never advocate that buying at the death cross and selling at the golden cross is an all-around good strategy. But for those who are experiencing anxiousness when met with the media's obsession with gold's recent death cross encounter, please take the above information into consideration.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.