Why the Golden Cross May Not Be Golden

Smita Sadana  Jun 29, 2009 11:05 am

Why the Golden Cross May Not Be Golden
 
Celebrations of the bear market's end may be premature.
 

Here's the 1974 bear market:



What they have in common: the slope of the 200-day moving average is either flat or rising. A flat trendline indicates time spent in rest and recovery, which has been a characteristic of the end of a bear market.

Reasons why this may not be the end of the bear market just yet:

As I discussed in S&P Watch: Dramatic Shift For 200-Day Moving Average?, assuming the S&P 500 doesn’t rise sharply for the next 2 months, the 200-DMA is going to encapsulate the broad declines in September and October, so that would imply we are faced with a falling 200-day moving average.

Now, let's assess the historical perspective around periods of sharp decline that result in a 200-DMA that's still declining when the market starts its rally.

Here’s a chart of 1932-1933, when the market had declined by a gut-wrenching 89.2% (closing high of 381.2 on Sept 3, 1929 to a low of 41.2 on July 8, 1932).



In a stunning 94% rally from that level, the Dow Industrials saw a Golden Cross, but then just spent time oscillating around the 200-DMA. Later on, it witnessed a Death Cross (which implied that the 50-DMA crossed below 200-DMA), shortly followed by a second Golden Cross (which ultimately signaled the real start of the bull market).
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Comments (2) See All Comments »
06-29-2009, 8:26 am
i just follow the 200 day simple moving average. if it is uptrending then be bullish. downtrending be bearish. when will it uptrend is the question. i am thing august if market doesnt fall apart again.
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07-29-2009, 9:30 am
Smita,

Excellent article.

I've been watching this trend since the initial October collapse.

I've been comparing the 200 day Simple Moving Average (SMA) with the 50 day Exponetial Moving Average (EMA)
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