Stocks Form 'Golden Cross' With Today's Market Close

Stocks formed the much-heralded "golden cross" on Tuesday, but traders waited until the market's actually closed before confirming it.

Ian Cumming | Axiom | Getty Images

The so-called golden cross — which occurs when the the 50-day moving average of the S&P 500 rises above the 200-day moving average—is considered a long-term bullish signal.

On Tuesday, the “cross” was formed just after the opening bell and managed to survive even though the S&P closed a fraction lower.

The The 50-day moving average closed at 1257.79, just above the 200-day average of 1257.19.

Birinyi Associates analyst Kevin Pleines said his analysis shows that when the 50-day crossed the 200-day in the 26 instances since 1962, the market was higher six months later 81 percent of the time.

The market pulled back after the S&P reached 1321, on a weaker than expected consumer confidence number and disappointing Chicago PMI.

"You had two poor numbers...That threw some cold water on what could have been a good day for the bulls," said Scott Redler of T3Live.com. "But right now we’re still taking it in stride. We’re in a neutral area where some bad news negates the early morning enthusiasm. Right now, the golden cross is still effective."

While some analysts say they don't give much weight to the "cross" and it's just a momentum sign, Pleines says it has a good track record.

“We’re pretty skeptical on a lot of the aspects of technical analysis and technical signals. We took this look back, and looked at it historically, and historically it is a pretty reliable indicator. The 50-day rising is a good sign of increasing momentum, and I think 81 percent is pretty reliable,” Pleines said.

In a note Monday, Bank of America Merrill Lynch technical analysts noted that the market could continue to be weak in the short term, but it may be better off medium term, thanks to the "cross."

“With the S&P 500 near-term vulnerable as momentum oscillators roll from overbought extremes we looked for a test of 1,294 support, potentially 1,269,” they noted. With the “cross” close at hand, “pullbacks should prove temporary before the bull trend resumes for the 2011 highs at 1,370,” the analysts wrote.

Pleines said he’s not surprised the market has pulled back recently, and that it could pull back further.

“I still think with the momentum we’ve had it still will cross over. The market is still overbought, you can’t expect it to not have a couple of down days. If it doesn’t happen in the next week, I don’t think it’s the end of the world,” he said.

Redler said he’s a bit skeptical of the “golden cross” theory, even though he sees merit in following the momentum of the 50-day rising above the 200-day.

“The ‘golden cross’ is indicating the market is trying to put itself back into a normal uptrend. That’s the constructive nature of it,” he said.

“It’s something fun to talk about, but it’s just another indicator to show the market has been acting more bullish. It’s not the end all and be all,” he said.

The real trend, he said. is that the market is testing an accelerated uptrend, or the rapid run its had since it gapped up Dec. 20.

Redler said the market showed resilience Monday, but if the S&P 500 closes below 1,303 to 1,307, it could go down to 1,277 to 1,285, and possibly 1,265.

“1,256 to 1,262 would be a retest of the downtrend the market broke on the first of the year,” he said.

Any correction would be shallow, he said, and traders are looking for a 2 to 4 percent correction, with already more than a percent wiped off the S&P.

“I felt like we needed to shake the tree but I didn’t know how much. I was willing to cover some shorts but not press it. I’m not really adding to my longs yet, “ he said.

But as for the “cross?”

“I’m not putting too much emphasis on it. When we had the Hindenburg Cross, when everyone said it was doomsday, we never really went lower,” he said.

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