I came across an article in this week’s The Edge magazine. The article touched on the technicals of the STI and I learnt about predication of long-term trends with the 50-day moving average and the 200-day moving average from the article.
When the 50-day moving average crosses above the 200-day moving average, a ‘golden cross’ is formed. This is a bullish signal for the long-term and the long-term trend is up.
However, when the 50-day moving average crosses below the 200-day moving average, a ‘death cross’ is formed. This is a bearish signal for the long-term and the long-term trend is down.
How can an investor use these signals? He can liquidate his positions when the death cross is formed and enter the market once again when the golden cross is formed.
I back-tested this strategy and I found that it’s quite reliably predicts the trend with extremely low occurrences of fakeouts. This can be seen from the chart below. A death cross was formed around early Jan 2008 and a golden cross was formed around mid-May 2009. Everyone knows it’s difficult to sell at a market top and buy at a market bottom. At least, with the signals, an investor could have cashed out before the market sell-off in 2008 and re-entered the market after the market bottomed in March 2009.