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.
- 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.
Support is a low price level that the market does not allow. Resistance is a high price level that the market resists. A breakout occurs when the price crosses one of these levels.
The last stage is a continuing uptrend after the crossover. The moving averages act as support levels on pullbacks until they cross back down.
The most commonly used moving averages in the golden cross are the 50-day- and 200-day moving averages. Generally, larger periods tend to form stronger, lasting breakouts. For example, the 50-day moving average crossover up through the 200-day moving average on an index like the S&P 500 is one of the most popular bullish market signals.
Day traders commonly use smaller periods like the 5-day and 15-day moving averages to trade intra-day golden cross breakouts. Some traders might use different periodic increments, like weeks or months, depending on their trading preferences and what they believe works for them.
But when choosing different periods, it's important to understand that the larger the chart time frame, the stronger and more lasting the golden cross breakout tends to be.
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.
The golden cross occurs when a short-term moving average crosses over a major long-term moving average to the upside and is interpreted by analysts and traders as signaling a definitive upward turn in a market. Some analysts define it as a crossover of the 100-day moving average by the 50-day moving average; others use the 200-day and 50-day moving average. The short-term average trends up faster than the long-term average until they cross.
A golden cross suggests a long-term bull market going forward. It is the opposite of a death cross, which is a bearing indicator when a long-term moving average crosses under a short-term one.
As a lagging indicator, a golden cross is identified only after the market has risen, which makes it seem reliable. However, as a result of the lag, it is also difficult to know when the signal is false until after the fact. Traders often use a golden cross to confirm a trend or signal in combination with other 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.