Investing bites: The Golden Cross
Investing bites is a series of short-one idea post on investment things I learn in less than 300 words.
The cross is a simple idea of using the moving average of a share closing price to predict the near-term trend of a share price.
The common time period used is 50 days and 200 days. Most charting will indicate this as MA50, and MA200.
When MA50 crosses above MA200, it’s known as the golden cross. This means that the share is on up-trending and is expected to go higher. This is an example for CIMB as of the second week of 2020. The pink (MA200) is nearing the yellow (MA50) line, and a golden cross will signal a strong buy.
Similarly, a reverse of the crossing will be considered as a dead cross. The price trend is switched and on a downtrend now.
While this seems very good to spot a trend, it’s possible for the chart to look as-if a cross will happen and then further trend down. Look at how many times AAL had tried to break the trend these two years, only to fall further.
I don’t know how likely you can win a trade with this charting. But I do use this to check that I don’t over-invest in a company in the dead cross zone.