Putting These Two Technical Indicators to the Test

A Golden Cross occurred for the S&P 500 last week

Senior Quantitative Analyst
Jul 15, 2020 at 8:12 AM
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There were a couple of notable technical indicators signaled over the past week that were mentioned in the media. There was a Golden Cross -- a popular chart pattern where the 50-day moving average crosses above the 200-day moving average -- that occurred for the S&P 500 Index (SPX). This is considered a bullish technical signal. Also, the Nasdaq Composite Index (IXIC) reached 20% above its 200-day moving average. This stat was used as a case for a market pullback. I’m looking at past signals of these indicators to see if the numbers line up with the conventional wisdom.

S&P 500 Golden Crosses

If you go back to 1950, there have been 35 previous Golden Crosses. The table below summarizes the returns going forward. For comparison, the second table shows returns at any time. The numbers support the assertion that this indeed is a bullish indicator. In the three months after a signal, the S&P 500 gained an average of 4%, with 77% of the returns positive. Typically, the index gains a little more than 2% in that time frame, with 66% of the returns positive. The returns after a signal also outperform based on average return and percent positive six months and a year after a signal.

Double pic

Nasdaq Composite 20% Above the 200-Day Moving Average

The second indicator mentioned was the Nasdaq spiking to 20% above its 200-day moving average. This stat was being used as evidence of an overbought market that was due for a pullback. When I ran the numbers, however, I came to the opposite conclusion. Going back to 1972 -- as far back as we have Nasdaq Composite data -- there have been 12 instances of the index reaching this height. I only considered the signal if it had been at least six months since the index got to 20% above the moving average. The index was higher every time a month later, averaging a gain of 4.3%. Also, the Nasdaq was higher all 12 times a year after the signals, averaging a gain of more than 20%. This is why it’s always a good idea to check the numbers.

Nasdaq double pic


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