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- The Dow Jones Industrial Average just flashed a closely followed technical buy signal on Tuesday.
- The so-called “golden cross” occurs when the 50-day moving average moves above the 200-day moving average.
- The indicator suggests more upside is in store for the Dow as it solidifies its uptrend.
The stock market just flashed a closely followed technical buy signal that suggests more upside ahead for stocks.
On Tuesday, the Dow Jones Industrial Average’s 50-day moving average closed above its longer-term 200-day moving average, flashing a technical “golden cross” for the first time since August 2020 amid the ongoing recovery from the COVID-19 pandemic.
The lagging technical indicator can help alert traders to securities in the stock market that are solidifying their uptrend and are likely to experience a continuation with higher stock prices. The Dow has surged 20% since its mid-October low, and the index is down only 6% year-to-date.
The opposite signal to the golden cross is the death cross, which is a sell signal that triggers when the 50-day moving average crosses below the 200-day moving average. The Dow flashed a death cross in March of this year, and the index subsequently went on to fall another 12% at its low.
But the technical buy indicator can sometimes be a head fake as it has a success rate of 64%, according to data compiled by The Chart Report. Ian McMillan analyzed a total of 81 golden crosses that occurred in the Dow dating back to its inception in 1896.
The analysis found that on average, stocks were higher three months after a golden cross 62% of the time, and higher six months after the golden cross 64% of the time.
The average three-month return when stocks were higher after a golden cross was 7.33%, while the average return six months after the golden cross was 10.65%.
Stressing the importance that moving average crossover signals are not perfect, Ari Wald, head of technical analysis at Oppenheimer & Co., said to The Chart Report, “All big rallies start with a golden cross, but not all golden crosses lead to a big rally.”
The golden cross signal is one of many trading patterns that technical analysts employ to buy stocks. Meanwhile, the bearish death cross is in addition to many trading patterns that traders use to sell stocks.