Little Apple's  Instablog

Today the 50 day simple moving average SMA of Sirius XM (SIRI) stock crossed over the 200 day SMA to form a "golden cross". As far as technical signals are concerned, this is considered to be the best time to buy a stock. As Brandon Wendell explains, this is an extremely bullish signal for a stock:

The "golden cross," or action of the 50-period moving average crossing over its 200-period counterpart, is a valuable odds enhancer for identifying and executing high-probability trades in all markets.

Many traders often ask me what the "golden cross" is. The actual definition of a golden cross is when a shorter moving average finally crosses a longer one, thus confirming a trend is intact. The definition that most traders are concerned with is the one where institutions and funds may start to take action, and therefore, start to drive a stock further into the trend with volume.

Consider this ten year history of Sirius XM, which shows several "golden crosses" over the last decade:

There is a "golden cross" in 2003, which precedes a $3 gain in share price over the next year. Then a very dramatic golden crossover at the end of 2004 which sent the stock skyrocketing from $2 a share to $9 almost overnight. In 2005 another crossover was followed by a $3 a share gain. A small, short lived cross at the end of 2007 created a $1 per share gain. This was followed by the most recent one in 2009 which lasted for two years and produced a $2 per share gain. So for the last 10 years Sirius has produced substantial gains every time the 50 Day SMA has crossed above the 200 Day SMA. So how much will the gain be this time? The answer to that question lies in the 2011 earnings results and the 2012 guidance to be reported on Thursday morning on the Sirius XM conference call.

Some analysts also look at the 50 day exponential moving average or EMA compared with the 200 day EMA. The "golden crossover" of the EMA is an indicator that the SMA is about to cross in the near future. This can be used by investors to spot a bullish trend. Then when the SMA produces a crossover it confirms the trend. As you can see on the chart above the EMA "golden cross" has always predicted the actual SMA cross. Last month the Sirius 50 day EMA crossed over the 200 day EMA on January 4, 2012. Sirius XM shot up 11% to close at $2.04 after the crossover. And it climbed all the way up to $2.19 on January 17 just 25 cents from the yearly high of $2.44. Again it did accurately predict the actual SMA "golden cross" which occurred today.

Disclosure: I am long SIRI.