Used correctly, the Golden Cross chart pattern is a very reliable technical signal to spot early-stage bull markets.
What is a Golden Cross?
A classic Golden Cross is defined as
1) the 50-day moving average crosses the 200-day moving average UPWARDS.
2) the 200-day moving average line must NOT trend down at the time of the cross.
However, in some cases, a solid uptrend can still be established when the 200-day moving average line is trending slightly down when it crosses. If so, shortly after the crossover, both the moving averages will be trending upwards. These crossovers are still considered as Golden Cross.
Below is a recent Golden Cross formation of GOLD in Mar 2022.
However, if the 200-day moving average is in a steep, clear downtrend at the time of the crossover, the crossover is not considered "Golden", and cannot indicate any uptrend. Profit taking selling pressure and a rush to exit after a modest rebound could push shares lower.
A perfect Golden Cross is when both the 50-day and the 200-day moving averages are trending up when they cross.
Below is the perfect Golden Cross for XOM in Jan 2021. XOM stock has more than doubled since then.
Why is the Golden Cross Predictive?
In a long-term downtrend, short-term moving average follows the stock price down much faster than long-term moving average, causing the 50-day moving average to drop below the 200-day moving average.
After a period of consolidation, the stock price may rebound. As the stock price rises, the short-term moving average follows the stock price up much faster than the long-term moving average, causing the 50-day moving average to move above the 200-day moving average, forming a Golden Cross. As the golden cross confirms a long-term uptrend, the stock price will continue to rise.
How to Use the Golden Cross Signal?
Stock prices are often already high and overbought at golden crosses due to the lagging effect. If a long-term strong uptrend is expected, it is perfectly fine to buy at a crossover. But there are two strategies that can help find a better entry point.
One is to buy ahead of the expected Golden Cross formation. If the stock price continues to break above resistances as it rises, and if the distance between the 50-day moving average and 200-day moving average is closing, we can expect a Golden Cross to form in the near future. Instead of waiting for the moving averages to cross, we go long the stock before the crossover to capture more price appreciation. The biggest disadvantage of this strategy is that the Golden Cross may never happen. Therefore, the uptrend will fail.
Another strategy is to wait for a pullback after the formation of the Golden Cross. Overbought and oversold technical indicators such as RSI and Stochastic are good references for this strategy.
The chart below depicts good entry points around the Golden Cross pattern of ZM in early 2020.
Limitations of the Golden Cross.
Golden Cross is a great signal to identify a continuing uptrend. However, like any other technical signal, Golden Cross is no guarantee that the uptrend will continue.
Moving averages lag. And similarly, the Golden Cross is a lagging indicator. When a Golden Cross formed, the stock price was already in an uptrend. The stock may be overbought and needs a pullback. Or worse, if the uptrend is a short one, stock price may have peaked and could fall shortly after the Golden Cross is formed.
This is why many chartists use shorter-term moving average crossovers, such as a 5-day moving average crossing over a 10-day moving average. But "Golden Crosses" based on the shorter-term moving averages cannot predict a long-term sustainable uptrend like a true Golden Cross.
Below is a perfect Golden Cross of QQQ from Nov 2015 that failed to predict an uptrend.
It is dangerous to trade stocks based on just one technical indicator. The Golden Cross is more reliable if used in conjunction with fundamental analysis and other technical signals such as trend lines, resistance levels, overbought & oversold signals etc.
How to Find Stocks with Golden Cross Patterns Using the FinTurtle App?
The FinTurtle app scans more than 10,000 U.S. stocks twice a day to detect stocks and ETFs that form the Golden Cross pattern. You can find all of these in real-time using its Golden Cross screener.
Follow the Step-by-Step Instructions and Illustrated Chart below:
- Open the FinTurtle App.
- Navigate to the Discover / Platinum / SMA 50/200 Golden Cross feature tile and click to open.
- You will see the comprehensive screener page. You may keep all default settings and click "Submit" at the bottom. The default setting is to display the stocks with the classic SMA50/200 Golden Cross pattern formation. If you would like to view Goden Crosses by other moving averages, or use other criteria to further filter the results, you can set the filters accordingly before clicking "Submit".
- You will get a list of stocks that have formed a Golden Cross over the past 2 weeks. The "Date" column shows when the SMA 50 crossed over the SMA 200.
- Touch to open the stock you are interested to view its fundamentals, charts, institutional holdings, insider trading and many other signals and insights.
(How to find Stocks with Recent Golden Cross Formation on FinTurtle App)
