Are you “the glass is half full” or “the glass is half empty” kind of person? This is the question investors looking at the current pattern in the US stock market should be asking.
Clearly the markets have been stuck in a trading range since late summer. However, the market can be looked at as either falling apart or rebounding:
So what should an investor do?
One tool that I find works well in situations like this is the Golden Cross. As defined by Investopedia:
Definition of ‘Golden Cross’
A crossover involving a security’s short-term moving average(such as 15-day moving average) breaking above its long-term moving average (such as 50-day moving average) or resistance level.
Investopedia explains ‘Golden Cross’
As long-term indicators carry more weight, the Golden Cross indicates a bull market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new support level in the rising market.
Technicians might see this cross as a sign that the market has turned in favor of the stock.
While short term stock traders like to look at crossovers that use shorter time frames, such as the 50/100 day moving average (as used in the example above), I have found that using a 50/200 combination works best for determining market direction.
While the 50/200 DMA Golden Cross does not “time” the bottom of a market cycle perfectly, it does give conservative growth investors a good confirmation that a new upward trend in the market has begun.
Looking at the current state of the S&P500 index, I would argue that the markets are starting to trend upward. The doom and gloom of Europe’s problems have had time to be priced into the market, and I think investors will start to become more positive as next year’s elections come closer and politicians begin to offer new solutions to our economic problems.