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Markets Near 'Golden Cross' But Is It a Good Sign?

The Dow Jones Industrials are nearing an important technical milestone that otherwise might be considered a pretty positive sign for the stock market.

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Ian Cumming | Axiom | Getty Images

Trouble is, the arrival of the much-vaunted Golden Cross — when the 50-day moving average crosses above its 200-day counterpart — faces a couple of obstacles as a beacon of stock bullishness.

First, history is, ironically enough, not on the market's side.

In the past 50 years, the Dow bluechip average has hit a Golden Cross 20 times. On the plus side, it has averaged a 0.20 percent gain in the week immediately following. But the median return — the midpoint of all 20 occurrences — for the week after is a 0.31 percent loss, and positive returns have come only a bit more than one-third — 35 percent — of the time, according to research from Bespoke Investment Group.

Moreover, one month and three months out from the occurrence, the market actually has typically lost ground. In the six months following, the average gain was 2.90 percent, but that actually is lower than the historical norm of a 3.53 percent gain for all six-month periods during the 50-year span.

"While you may hear bulls touting the Golden Cross when it occurs in the coming days, know that at least for the Dow, it's nothing to get excited about," Bespoke's Paul Hickey said in a research note.

The second thing the Cross has going against it is current market behavior.

While technical analysis often can prove effective in tracking market trends, it's provided limited help during 2011, a year in which traders reacted far more to headlines coming out of Europeand Washington than it did trend lines on charts.

"From a technical standpoint, that's something we do track," said Todd Schoenberger, managing director at LandColt Trading in Lewes, Del. "The problem with technical analysis right now is there are so many ancillary items that take place in the world now that move the markets.

"It doesn't matter what the 50-day moving average is on any specific stock. When we start thinking about anything taking place, especially in the euro zone, it's much more powerful than anything happening on the technical charts."

The Golden Cross's evil twin is the Death Cross, which happens when the 50-day slips below the 200-day moving average.

Yet that supposedly bearish sign actually has been a good portent of a coming rally, said Ryan Detrick, senior analyst at Schaeffer's Investment Research in Cincinnati. Schaeffer's has studied the Death Cross and found it, along with the Golden Cross, to be unreliable, at least in terms of conventional thinking.

The better analysis, in fact, may be contrarian, in that either cross comes after overheated market sentimentin one direction or the other that may be about to wear off.

"Death crosses are actually extremely bullish," said Detrick, pointing most recently to the one that occurred prior to the autumn 2010 rally. "It's something we talk about, and the (Golden Cross) actually sounds more bullish than it is. Everyone can understand it. But the relevance isn't that much."