The S&P 500 is about to light up a closely watched golden cross that suggests further gains.

  • The S&P 500 is on the brink of a technical buy signal later this week.
  • A golden cross occurs when the 50-day moving average moves above the 200-day moving average.
  • The indicator suggests that the S&P 500 may have more upside potential, which is up 15% from its October low.

The stock market is on the verge of giving a technical buy signal followed by a technical signal that suggests more upside potential for the stock.

On Tuesday, the rising 50-day moving average of the S&P 500 was only 26 points below the falling 200-day moving average. With the gap between the two averages narrowing by about eight points a day, the S&P 500 is on track to flash a golden cross by the end of this week, barring a major sell-off during this period.

If a technical signal does materialize, it would be the first time for the S&P 500 since July 2020 amid the ongoing recovery from the COVID-19 pandemic. Shares are up 52% ​​since the gold cross in July 2020.

The indicator can help alert traders to securities in the stock market that are consolidating their uptrend and are likely to experience a continuation with higher stock prices.

In December, the Dow Jones Industrial Average flashed a golden cross signal. Since then, the index has remained virtually unchanged.

Meanwhile, the Nasdaq 100 is still far from making a golden cross, which is what traders will want to see to confirm that the recent stock rally could continue into 2023.

The signal opposite to the golden cross is the death cross, a sell signal that is triggered when the 50-day moving average crosses the 200-day moving average. The S&P 500 showed a death cross last March and the index subsequently fell another 16% to its low.

But the technical buy indicator can sometimes be fake as it has a 64% success rate according to data compiled by The Chart Report. Analyst Ian McMillan studied a total of 81 gold crosses that have occurred in the Dow Jones Industrial Average since its inception in 1896.

He found that, on average, stocks were higher three months after the golden cross 62% of the time and higher six months after the golden cross 64% of the time.

The average return in the three months that shares rose after the gold cross was 7.33%, and the average return six months after the gold cross was 10.65%.

Emphasizing the importance that moving average crossover signals are imperfect, Ari Wald, head of technical analysis at Oppenheimer & Co., said in The Chart Report, “All big rallies start with a golden cross, but not all golden crosses lead to a big rally.”

The golden cross signal is one of many trading patterns that technical analysts use to buy stocks. Meanwhile, the bearish death cross is an addition to many trading patterns that traders use to sell stocks.

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