Featured Article

Back to the Future Redo?

Brandon Wendell
Instructor, CMT

A lot of TV air time was recently spent on the famed “Golden Cross” of the S&P 500 Index and how it may predict a long term rally in the markets for 2012. The golden cross is when the 50 day simple moving average crosses above the 200 day simple moving average. It is considered by many to be a buying signal and usher of bull markets.

In previous articles I have written about the comparisons to the current market environment and the charts of the Dow in the 1970’s. To refresh your memory, I have included the chart I used in the article, “An Interesting Parallel” in July 2011.

bwendell 20120207 - stockschart20120207aFigure 1

I wanted to look at that chart again as we have now finished 2012 and are looking at 2012 for opportunities. We can see that not much has changed as far as the similarities on the larger term chart. The mid-year dip and rise was predictable according to what we had seen in 1976! In fact, it is interesting to see how much the price patterns of 2010 and 2011 mimicked that of 1975 and 1976.

bwendell 20120207 - stockschart20120207bFigure 2

So what is to be made about the golden cross that was talked about so highly by TV announcers and stock pundits? Nothing. That’s right, nothing. The same pattern also occurred in 1976 and induced investors to buy just before a large drop in price.

bwendell 20120207 - stockschart20120207c Figure 3

Moving averages are lagging and do give indication of trend. But the trend they indicate is that of the past and not necessarily that of the future. The European debt crisis hasn’t magically solved itself. The US is also burdening itself with massive debt. Yahoo Finance recently ran a story that highlighted the biggest holders of US debt. Nope, China was number two. The Federal Reserve was numero uno! We printed enough money to buy more of our debt than anyone else.

So to say the worst is behind us may be a bit premature. I am not being a pessimist, just a realist. Traders and investors must be sharp and vigilant with their capital. Fortunately, the markets printed a treasure map for us back in the 1970’s.

– Brandon Wendell bwendell@tradingacademy.com

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.