Dow rings in 2012 with a golden cross

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I often refer to the 50- and 200-day moving averages in my commentary as indicators of the intermediate and primary trends respectively. In a perfectly bullish scenario the price series should trade above both the 50- and 200-day lines, with both these lines rising, and also with the 50 DMA trading above the 200 DMA.

In the case of the Dow Jones Industrial Index, the 50 DMA has just breached its 200 DMA, thereby forming a so-called golden cross. This is the first time the 50-day line trades above the 200-day line since August 2011. However, as always with charting signals, it is wise to wait a few days in order to guard against a false break.

The Dow has experienced 20 golden crosses over the last 50 years. Although historically the Dow traded in positive territory after six months in 65% of the instances following a golden cross, the average return of 2.9% is not all that exciting as it lags the 3.5% average of all six-month periods (research via Bespoke Investment Group).

As far as the S&P 500 Index, the Nasdaq Composite Index and the Russell 2000 Index is concerned, the 50 DMAs were still trading below the 200DMAs by 1.56%, 1.69% and 4.34% respectively as of yesterday’s close.

Source: Artur Hill, StockCharts, January 4, 2012.

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