The Big Picture: Jul 7, 2020

Few charting patterns receive as much attention as the death cross and the golden cross. In a death cross, the 50-day moving average falls below the 200-day moving average, suggesting lower prices ahead. In a golden cross, the 50-day moving average moves above the 200-day, portending higher prices.

As we marvel at the speed and distance of the market’s bounce since March 23 and question whether the Fed’s assistance somehow invalidates it, it’s worth noting that SPX is about to experience a golden cross.The last time a golden cross occurred was on Mar 29, 2019. SPX closed at 2834 that day and rallied nearly 20% to 3393 on Feb 20, 2020 before crashing 35% over the following month.  [Incidentally, the Mar 30 death cross was a head fake, as the bottom was already in and stocks barely paused.]

The previous instance came on Apr 25, 2016 when SPX closed at 2087. It went on to rally over 40% until topping out on Sep 21, 2018 and shedding 20% over the following three months. Looking at only these most recent instances, one might think a golden cross is a very bullish signal to throw caution to the wind – at least for a while.

On Dec 24 2015, however, a golden cross turned out to be one of the greatest headfakes in years.  SPX pushed slightly higher over the next two days, then plunged 13% in a matter of 14 sessions.The biggest question in the investment world these days is whether the 15-minute 35% crash in March was an isolated incident and we have clear sailing ahead or whether there’s a bigger storm up ahead.

To put it another way, has the massive central bank intervention really precluded any more downside?

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