Thursday, May 7, 2009

Golden Cross as Contrary Indicator -- a look at Goldman Sachs (GS)

in the jargon of Technical Analysis (oh how I hate that term) a 'Golden Cross' occurs when the 50 day moving average of a security crosses above the 200 day moving average. in the world of vulgar 'Trend Following' this is considered a bullish indicator / buy signal.

but here at Trend & Value, we (I) tend to look upon this indicator in a contrary manner, particularly in the context of an overall bear market in equities, as it tells us that a vast portion of the recovery in the share price has already occurred.

well I saw some headline about a controversy surrounding a former or not so former Goldman Sachs employee today, so I thought to take a look at how shares of GS were performing. down some today, but what popped out at me was the moving average cross-over.



this indicator, like any other, shouldn't be used in isolation, but can be added to the weight of the evidence when determining the overall prospects for a stock.

as to GS itself, I haven't much of an opinion. the share price does look over-extended, but GS is a pretty complicated entity, so I'd rather stick to stocks that are easier to analyze from a valuational perspective.

but as this General Liquidity Rally is getting long in tooth about now, using the 50/200 dma cross as a screen for selling opportunities should come in useful. it is one of the things have helped identify potential selling opportunities in the past* and I think it will come in handy moving forward.

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*case in point would be MCD which saw a 'golden cross' back in January when the share price was hovering above 60. in the newsletter I suggested shorting the symbol back then. The 'reason' for my bearishness on MCD was (and is) based on valuational concerns, but the ma cross helped me identify the timing of the opportunity.

more recently in the newsletter (April 24), I used the screen to identify DBRN as an over-extended issue. the jury is still out on that one, but here is a chart of DBRN as another example of the golden cross as contrary indicator concept: