Stocks could be close to sending a longer-term bullish signal, just as analysts expect the current sell off to continue a bit longer.
The so-called “golden cross” is close to being triggered in the S&P 500, according to some technicians.
The “cross” happens when the 50-day moving average rises above the 200-day moving average, signaling a continuing uptrend.
“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,” Bank of America Merrill Lynchtechnical analysts note Monday. 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.
“As of right now, the 200-day is at 1,257, and the 50-day is at 1,256, so it’s one point away from happening. I think it will come, if you look at what the 50-day looks like,” said Birinyi Associates analyst Kevin Pleines.
He 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.
Pleines said he’s not surprised the market has pulled back, and 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.
“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.
Scott Redler of T3Live.com follows the market’s short term technicals, and he sees similar trends — a short term sell off and longer term uptrend.
But he’s 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. He said the real trend is that the market is testing an accelerated uptrend, or the rapid run its had since it gapped up Dec. 20.
Redler said 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. He said any correction would be shallow, 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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