The Magic of Moving Average Crossovers
By now, you’re well aware of how to find trends using simple moving averages, such as the 50- and 200-day moving averages. But you should also know how to potentially spot when a trend could stop dead in its tracks, or birth a new trend.
All we have to do is wait for a crossover to do so.
For example, we can spot a bullish “golden cross” when the short-term moving average, such as the 50-day crosses above the longer-term average, such as the 200-day. When this happens, we’ll typically see a move higher in a stock or an index.
Look at the Dow Jones Industrials for example.
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After being demolished in January 2016, look at what happened to the index once the 50-day crossed well above the 200-day. The market rallied. Such a crossover should never be a sole indicator, though. We want to confirm what we’re seeing with other indicators, too, such as relative strength (RSI), MACD and Money Flow.
We can even see it in the US Dollar.
In late October 2016, the bullish crossover birthed quite a rally.
Or, we can spot the bearish “death cross” when the short-term average, such as the 50-day crosses below the longer-term average, such as the 200-day. When this happens, we’ll typically see a move lower in a stock or index. Let’s look at the USD again.
We can see that each time the 50-day crosses below the 200-day, the currency fell.
Granted, crossovers can be late to the game, as we saw with a June 2017 crossover, but they’re still useful and important to be well aware of. Again, confirmation is key with other momentum indicators, too.
It’s just another indicator to be well aware of any time you trade a stock, an ETF, and even indexes.
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