What is a Golden Cross?

A golden cross is a phenomenon in which the short-term moving average of a given security outdistances the long-term moving average for that same security. At the time that this type of crossover takes place, investors and analysts see this as an indication that something is about to happen in the market where the security is traded. When a golden cross occurs, this is often considered a sign that the marketplace is moving in a bullish direction, meaning that trading levels are about to increase noticeably.

An example of a golden cross would be a situation in which a given security experiences an upswing in moving average in as short time frame, such as fifteen days. Should that upswing exceed the security’s previous upward movement over a longer period of time, such as sixty days, then this type of cross has taken place and investment professionals will begin to analyze the reasons for the sudden short-term upswing. Often, the reasons behind the sudden increase will lead investors to predict that now is the time for investors to buy, since a bull market is developing.

Not all investment experts automatically assume that a golden cross automatically means that a market is becoming bullish, or is about to experience an increased volume of trading. While there is general agreement that a golden cross involving a high profile security is a signal that something is about to happen, there are those that believe the activity could also indicate that the market will move in a bearish direction, with trading slowing somewhat. This means that the only way to accurately utilize a golden cross as a market indicator is to assess the impact that the cross is likely to have on other securities traded in the same marketplace.

In some cases, the reasons for the golden cross are short-lived. The phenomenon may be brought on by a combination of factors that exert influence on market movements for a short time before the market adjusts and offsets that impact. This is often true in situations where changes in corporate leadership, concern about the outcome of political elections is apparent, or when a natural disaster temporarily impacts production within a given industry. Once the impact of those events on investor activity have diminished, then the market will level off and continue responding to other factors that are likely to provide some idea of where the market is going in the long-term.