In the midst of extreme negative sentiment around gold and price drops that are out of proportion, some people can hardly imagine that good news does still exist. Our aim is to focus on the truth, and nothing but the truth no matter how difficult it is.
The writers out there who scream that the “death cross” on gold’s chart is the most bearish signal could prove to be dead wrong.
First, for the non-traders and chart illiterates a short explanation on the term “death cross.” The phenomenon occurs when the 20 day moving average falls below the 50 day moving average. Traders pay a lot of attention to these moving averages. The general rule of thumb is that this chart formation signal a consistent downtrend. The opposite is held true as well. When the 20 day moving average rises above the 50 day moving average, a “golden cross” occurs which signals an uptrend. As the next chart shows, gold is hitting a “death cross” so the general wisdom says that the general trend is (much) lower.
Beware the assumptions! Of all those writers who apply the general rule to the gold market, how much did check their underlying assumption? Not many. That’s why it is critical to have access to the right insights and information, through correct research.
Case in point: it appears that the “death cross” formation does not have predictive value in the case of gold.
Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, analyzed the “death cross” formations in gold since 1972. The result of his research is summarized in the following table(s). Since 1972, gold passed through 22 “death cross” formations which returned between 1.29% (in the month after) and 3.17% (in the following six months). Comparing those figures with the average day since 1972 (third table), it appears there is only a slight difference.
The findings go further than that. The “golden cross” formation appears to be similarly irrelevant for gold. The returns between 1 and 6 months after the formation are neutral to negative.
Gold Silver Worlds | February 21, 2013