What Is a Golden Cross?
A golden cross is a chart pattern in which a relatively short-term moving average crosses above a long-term moving average. The golden cross is a bullish breakout pattern formed from a crossover involving a security's short-term moving average (such as the 50-day moving average) crossing above its long-term moving average (such as the 200-day moving average) or resistance level. As long-term indicators carry more weight, the golden cross indicates the possibility of a long-term bull market emerging. High trading volumes generally reinforce the indicator.Key Takeaways
- A golden cross is a technical chart pattern indicating the potential for a major rally.
- The golden cross appears on a chart when a stock’s short-term moving average crosses above its long-term moving average.
- The golden cross can be contrasted with a death cross indicating a bearish price movement.
How Does a Golden Cross Form?
The golden cross is a momentum indicator, which means that prices are continuously increasing—gaining momentum. Traders and investors have changed their outlooks to bullish rather than bearish. The indicator generally has three stages.The first stage requires that a downtrend eventually bottoms out as buyers overpower sellers. In the second stage, the shorter moving average crosses over the larger moving average to trigger a breakout and confirms a downward trend reversal.
The last stage is a continuing uptrend after the crossover. The moving averages act as support levels on pullbacks until they cross back down.
Example of a Golden Cross
The image below uses a 50-day and a 200-day moving average. The 50-day moving average trended down over several trading periods, finally reaching a price level the market couldn't support. The 200-day moving average flattened out after slightly trending downward. Prices gradually increased over time, creating an upward trend in the moving 50-day average. The trend continued, pushing the shorter-period moving average higher than the longer-period moving average. A golden cross formed, confirming a reversal from a downward trend to an upward one. Notice that the price range of the candlesticks made a significant jump when the downward trend bottomed out and turned into an uptrend. Something likely occurred that changed investor and trader market sentiments at this time. The candle bodies were large (the difference between open and close prices), and more days closed with prices much higher than opening during the first uptick after the 50-day moving average bottomed.The Difference Between a Golden Cross and a Death Cross
A golden cross and a death cross are opposing indicators. The golden cross confirms a long-term bull market going forward, while a death cross signals a long-term bear market. Either crossover is considered more significant when accompanied by high trading volume.
- A possible long-term bull market is approaching
- The short-term moving average crosses from below the long-term moving average
- The long-term moving average becomes support
- A possible long-term bear market is approaching
- The short-term moving average crosses from above the long-term moving average
- The long-term moving average becomes resistance
Once the crossover occurs, the long-term moving average is considered a major support level (in the case of the golden cross) or resistance level (in the instance of the death cross) for the market from that point forward. Either cross may appear and signal a trend change, but they more frequently occur when a trend change has already occurred.
Limitations of the Golden Cross
All indicators are “lagging,” which means the data used to form the charts has already occurred. This means that no indicator can truly predict the future. Many times, an observed golden cross produces a false signal. Despite its apparent predictive power in forecasting prior large bull markets, golden crosses also regularly fail to manifest. Therefore, other signals and indicators should always be used to confirm a golden cross.How Do I Identify a Golden Cross on a Chart?
What Does a Golden Cross Indicate?
Are Golden Crosses Reliable Indicators?
The Bottom Line
A golden cross is believed to confirm the reversal of a downward trend. The key to using the golden cross correctly—with additional filters and indicators—is to use profit targets, stop loss, and other risk management tools. Remember to maintain a favorable risk-to-reward ratio and to time your trade rather than just following the cross mindlessly.