Golden Cross can be seen as a Holy Grail of bullish technical indicators in the eyes of many traders. To flatten out short-term volatility, traders traditionally use the 50-day moving average and the 200-day moving average. When a 50-day moving average moves up through the 200-day moving average, they often see it as a confirmation of an emerging bullish trend, mainly due to the lag on the two moving averages. In theory, it indicates short-term momentum and a potential change in trend direction.

What Does the Golden Cross mean You?

When you encounter a Golden Cross, it is safe to say that no two charts are ever identical. However, there are three distinct stages of the Golden Cross, which are:

Buyers taking control of a downtrend

By definition, due to short-term weakness in the 50-day moving average, a Golden Cross will occur after a downtrend. The resulting strength in the 50-day moving average comes about when the short term sellers dry up, and the buyers begin to take control. The chart will level out, and then buyers move into the driving seat, with the price moving higher.

Momentum moves the 50-day average through the 200-day average

This is the turning point. If the upward momentum continues, the 50-day moving average will eventually push up through the 200-day moving average. This is the point at which the eyes of many traders will light up! Is this a new trend or a false flag?

Consolidation, then resume up trend

When the 50-day moving average moves sharply up through the 200-day moving average, it indicates strong momentum. Sometimes this can lead to short-term overbought situations. Technical charts often reflect these cases in periods of consolidation, sideways trading, or partial retracement. This is the key moment. If the asset price trend is changing, the buyers will eventually regain control, moving the asset price to higher ground.

Many traders make the mistake of buying too early. The critical error here is to buy before the uptrend has been confirmed, and the period of consolidation is over. If you invest too early, you may encounter a pullback towards the 200-day moving average. This may lead to a retracement below the trendline. There is an easy way to tell what degree of risk traders are willing to take. It depends on whether they wait and see the trend’s confirmation after what they expect to be a consolidation period.

Example of a Golden Cross

Next, we will demonstrate a Golden Cross and how the trend may progress. To that end, we will use the EURUSD as an example. Let’s look at the chart below. The pink line (indicating the 50-day moving average) moved up through the brown line (indicates the 200-day moving average). At that point, the index went into a period of consolidation. Afterward, it briefly fell back below the 50- and 200-day moving averages. However, while the 50-day moving average remains above the 200-day moving average, we consider the trend intact.

Once we could confirm the change in trend towards the end of the area marked by the box, this resulted in a significant upward movement in the index. Even though this period of consolidation/sideways trading is perhaps more elongated than normal, it does highlight the various stages of a changing trend.

Death Cross is the exact opposite of a Golden Cross. It indicates the weakening of a positive trend and the emergence of a bearish trend. Very often, due to growing short-term downward momentum, this can lead to a short-term oversold situation. It is not uncommon for the index level to rebound on or around the Death Cross date. Much like an overextended elastic band snapping back, this is all part of the Death Cross process. However, it can prompt some inexperienced traders to discount the signs of a potentially changing trend.

Example of a Death Cross

The following chart perfectly illustrates the various stages of an emerging downward trend. In particular, you should take a close look at the area in the box. As you will see, the currency had been stuck in a trading range for some time before the sellers took control, pushing the currency lower. Interestingly, the crossover period came just after a sharp sell-off. There was then a few days of consolidation, another sharp sell-off, and then another period of consolidation. 

Experienced traders would have waited until confirming the emerging downtrend towards the end of the shaded area. Yes, they would have missed some of the earlier downturns, but the trend would have, in their eyes, been all but certain. Consequently, this led to a 300+ point fall in the USDJPY pair and a relatively quick recovery. The market reached its bottom at around 104.647. The recovery was fairly strong.