Follow These Technical “Crossovers” to Profits
Technical analysis has become so commonplace that even
though fundamental analysts may dismiss it, they still
follow the most widely accepted technical analysis
measures, because they know everyone else is doing so.
Two such widely used measures that technical analysis has
uncovered can help investors maximize their returns and/or reduce their losses.
The simple moving average in technical analysis measures the average price of a
particular stock or market over a period of time. A fiveday simple moving average is
calculated by taking the closing price of a stock or market for five consecutive days,
adding them together, and dividing by five, to achieve the average price during that
period or, in technical analysis terms, the fiveday simple moving average.
The most important and most used simple moving averages are the 50day and the
200day moving averages. The 50day simple moving average in technical analysis
captures the mediumterm trend of a market or stock. The rule is that, as long as
the price of the stock on the technical chart trades above the 50day moving average,
the stock is said to be trending higher or in an uptrend in the medium term.
The longterm uptrend or downtrend can be defined by the 200day simple moving
average. As defined by technical analysis, a stock that trades below the 200day
moving average is said to be in a bear market. Conversely, a stock that trades above
the 200day moving average is said to be in a bull market. For this reason, the 200
day simple moving average is a very important indicator for a market or stock,
according to technical analysis.
One of the most watched technical indicators on a technical chart is the crossover.
When the 50day simple moving average crosses above the 200day moving average
on the technical chart, this is bullish for the stock or market being followed. This is
known as the “golden cross” in technical analysis because the mediumterm
indicator has gained more momentum than the longerterm indicator, which means
the stock price has momentum behind it to make it rise.
When the 50day moving average crosses below the 200day moving average on the
technical chart, this is bearish for the stock or market being followed. This is known
as the “death cross” in technical analysis, because the mediumterm indicator is
losing more momentum than the longerterm indicator, which means the stock price
is set to fall.
As always with technical analysis, a visual example via a technical chart is the best
way to illustrate the theory.
Chart courtesy of www.StockCharts.com
The above is a technical chart of Oracle Corporation (NASDAQ/ORCL) from 2010.
Notice point number three, where the 50day moving average (green line) crosses
below the 200day moving average (red line). Right after this death cross, the stock
price of Oracle traded lower.
Now take point number four on the above technical chart. Here the 50day moving
average crosses above the 200day moving average, which is known as the golden
cross, signaling bullish momentum. Notice how the stock of Oracle continued to
trade higher after the bullish crossover.
The golden cross and death cross are useful technical indicators that can help an
investor know when to buy and/or sell a stock or market. They are common yet
powerful tools in technical analysis that investors should be familiar with and use.