Golden Cross and Death Cross

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.

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3 thoughts on “Golden Cross and Death Cross

  1. Here is my simple plan for a lazy caterpillar.

    I am waiting for the next stock market meltdown. In the mean time I will consolidate the bullets.

    Once I hear the news that markets crashed like mad in the headlines, I will go in with my machine guns for the following.

    1)SMRT => I expect the SMRT to be operational for the next 20 years. Imagine MRT system collaspes and people travel with bicycles? Lolz
    2)Singtel => All Telcos M1 or Starhub leases lines from SingTel. People love to talk.
    3) SGX => If this fails, you don’t even need to trade stocks.
    4) SPH => Newspaper has been around since beginning of civilization.

    When the papers say times are good and property stocks are up, I will unload everything and wait for the next crash.

    Thats my lazy style. I am waiting for the market to crash in June 2011, if not then have to wait for the property bubble in China to crash.

    I guess the reason why asia stocks did very well recently is because the bankers of america used their ill gotten gains and vested them here while they print money back home.

    What do you think?

    • Hi LC,

      Major meltdown always provides opportunities to buy cheap undervalued stocks of excellent companies. I think the companies you chose have a wide moat. I like these companies too. However, I don’t like to speculate on the market and thus, I will stay invested in the market. I will wait for the market to present the opportunities and then I will act. Time in the market is more important than timing the market. Just my thoughts. Cheers!

  2. As much as I agree with you, I cannot help myself just to comment for discussion sake.

    Personally I have 3 bank accounts.
    1 for spending
    1 for saving
    1 for investment.

    Saving accounts is used to buy long term insurances and saving cash (4 months worth) for emergencies.

    Spending account for paying bills, food etc.

    Investment accounts has only been spilt 50% to 50% recently. I used to be like you. Just dump my money in companies I like (without research) and although I do well, I feel that it is not progressing fast enough.

    So now I am doing of some sort of experiment. Liquidating 50% of the long term for this. This happened just before the Japan earthquake. I want to do a comparison of which will do better. So Far I have gain about 120% more (on paper as I having sold them yet) than what I would have gotten by leaving them alone. I count myself lucky as I liquidated just before the quake and unlucky for not liquidating everything. But the bottom line is I didn’t lose any money so I tend to take lesser earnings with a pinch of salt. However I plan to liquidate that 50% again very very soon. (Sell in May and Go Away).

    Lets see how I do. But I am pretty sure in less than 2 years time, I will just buy out after a crisis and let the money grow itself. Thats how Lazy I can be…… Cheers.

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