2 Simple (But Powerful) Indicators You Need To Know About
Some folks may think it’s “witchcraft,” but understanding technical analysis can be very helpful — and profitable — when it comes to investing.
There are a number of technical indicators out there. For instance, some folks like to check on a stock’s MACD (moving average convergence divergence) oscillator, which can help determine a stock’s trend and momentum. Or they might keep an eye on a stock’s moving average with Bollinger bands. Then there’s the Relative Strength Index or RSI for short.
The list of technical indicators is endless.
But one of the simplest indicators to look at is a stock’s 50-day and 200-day moving average. These two moving averages represent the average price of the stock over these respective time frames. The 50-day, of course, is a short-term tool, while the 200-day is used to judge longer-term price trends.
If a stock breaks below its 50-day moving average this is often interpreted bearishly as a sign of a short-term downtrend. If it breaks through its 200-day moving average this is considered a signal of a longer-term bearish downtrend. The opposite is true to the upside as well.
Introducing: The ‘Golden Cross’ And The ‘Death Cross’
Now, simply looking at moving averages will often not get you very far when analyzing a stock. But every so often, we find key bullish and bearish formations using these indicators, known as either a “death cross” or a “golden cross.”
A death cross is when the 50-day moving average falls below the 200-day moving average. Simply put, this means that the short-term average price of the stock is falling below its long-term average. Technical analysts argue that this is an extremely bearish sign because it marks the reversal of a trend and that long-term support for a stock has been breached.
We can see how this played out looking back to the financial crisis. Around December 2007 the 50-day moving average for the S&P 500 fell below the 200-day moving average — a death cross — indicating it was time to get out.
Those who followed this bearish indicator would have avoided nearly the entire market crash.
The golden cross is the exact opposite of the death cross. Once the 50-day moving average rises above the 200-day moving average it forms a golden cross — a major bullish indicator.
The S&P 500 formed a golden cross roughly three months after bottoming out, signaling it was time to get back into the market.
This simple technical indicator would also have helped you avoid the dot-com bust in the early 2000s and the financial crisis in 2008-2009. But more importantly, you would have been back in the game just shortly after the market bottomed in both cases.
Bringing It All Together
You can see from the two charts above that this is a powerful indicator. It can help you determine not only when to get out of the market at critical junctures, but also when to get back in. Granted nothing is for certain when it comes to investing. But this can be another tool in the toolbox when trying to make critical decisions in the market.
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