Is that a golden cross I see?

by Jay Pestrichelli on December 8th, 2011

Despite the fear in the markets these days, the QQQ’s are about to show a classic technical bullish signal, the Golden Cross. I’m talking about the 50-day moving average crossing from below to above the 200-day moving average.
Many perceive the crossing of these longer-term moving averages to be a confirmation of a trend, but does that mean its time to go long?

Looking back over the life of the QQQ’s, the 50-day has crossed the 200-day 8 times so far, and with a flat or up day on Thursday 12/7, it will be the 9th time.

After a cross, performance over the next month and next quarter is mixed. The results are divided between flat or positive performance with one negative result in 2008. So take this as a bullish signal, right?

One of the concepts we drive home in our book, Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term is to understand and know the risk metrics of an investment. Flat to up seems like a pretty good prospect these days. Perhaps this is true, but be aware that every time this cross occurred, there was a cheaper time to buy within the next 30 days than the day of the cross itself. Some occurrences are more dramatic than others, but to date, the Q’s have never gone straight up post cross.
This is not meant to influence investors to try and time the market and pick a short-term bottom – that’s a relatively rare victory. The message is that based on history there will be a cheaper price. It may not be much, cheaper, but we should expect it. I know we all feel the regret when missing an opportunity for profit, but when market conditions telegraph caution, its good to know that there will be another chance at a better price to get in.


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