There are many technical indicators available in the realm of technical analysis. The golden cross and silver cross technical buy signals are some of the more popular and widely used indicators. They are trend-following indicators that can help investors and traders better understand the underlining trends of security.
A golden cross occurs when the security's shorter-term moving average (i.e., 50-day ma) crosses above its longer-term moving average (i.e., 200-day ma). A silver cross occurs when the security's 20-day moving average crosses above its 50-day ma.
Either of the above technical conditions is bullish. They signal the transition from a corrective or consolidating trend to the resumption or the start of the next uptrend.
As the silver cross and golden cross technical buy signals have become increasingly popular, they led to the developments of the Silver Cross and the Golden Cross Indexes. Both indexes display the percentage of stocks in an index that have fulfilled the silver and golden cross buy signals. For instance, SPX Silver Cross Index (SCI) shows the percentage of SPX stocks that have confirmed near-to-medium term crossovers, where the 20-exponential moving averages crossed above the 50-exponential moving averages. The Golden Cross Index (GCI) also shows the percentage of SPX stocks that fulfilled the 50-EMA crossing above the 200-EMA. SCI and GCI can be excellent breadth indicators offering a better picture of the number of stocks currently participating in the rally.
Remember, moving average indicators are lagging indicators, and as such, they are far from perfect. They may not accurately predict the future trend but can help traders and investors better gauge underlining trends. Also, silver crosses tend to produce far more false signals than golden crosses. Probably, due to the shorter-term timeframes and the volatile nature of the shorter-to-medium-term moving averages crossovers.
Silver Cross and Golden Cross Indexes are also not infallible. However, these indexes can give traders and investors an objective and clear understanding of the depth and underlining trend of the market participants over intermediate-to-longer-term time frames.
Like many technical indicators, divergences (negative and positive) can signal waning/strengthening trends and waning/strengthening market breadth. If the condition persists, it can lead to trend reversals (breakdowns and breakouts).
Enclosed below are the Silver Cross Index and Golden Cross Index applied to several important US stock market indexes. Divergences may be developing between the two indexes (SCI versus GCI), suggesting fading market participation. Another technical interpretation is the larger market-cap names are supporting the recent market rallies.
The question then becomes, are these near-term divergences and normal market consolidations or intermediate-to-longer term warnings of market tops?
We recommend investors and traders monitor these technical conditions carefully. If they persist into the summer months, then this warns of seasonal weakness during the early-fall period (i.e., Sep/Oct timeframe) and possibly the start of a major correction or even a bear market decline.