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DJIA: The Dow's Golden Cross and the Vulnerability of Lag

DJIA: The Dow's Golden Cross and the Vulnerability of Lag

2019-03-19 16:30:00
James Stanley, Currency Strategist
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DJIA, Dow Jones Talking Points:

- The Dow Jones Industrial Average has continued to gain with Boeing (BA) holding support at a key area on the chart following another gap-down to start this week’s trade. Stocks are flying high ahead of tomorrow’s FOMC rate decision.

- Q4 of last year saw an aggressive sell-off develop in US equities. But that’s flipped to an aggressive bullish trend that’s remained alive for most of 2019 trade, save for a one-week sell-off earlier this month. But now the bullish trend is getting long-in-the-tooth, and a ‘golden cross’ has just shown via the 50 and 200-day simple moving averages. This article looks at how such an event can be used while also incorporating some shorter-term strategy around DJIA.

- DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

DJIA: Dow Jones Golden Cross Shows Up Three Months After the ‘Death Cross’

It’s a big day in equity world, as you will likely hear throughout the day the Dow Jones Industrial Average is showing a ‘golden cross’ on the daily chart. This is when the 50-day moving average crosses up and over the 200-day moving average; and as many traders with technical backgrounds are aware, this is meant to signal increasing strength as the shorter-period moving average increases above the longer-running average.

This is the polar opposite of the ‘death cross,’ which is when the 50-day moving average crosses down-and-under the 200-day moving average, meant to show bearish continuation potential.

But while the media rarely misses an opportunity to apprise its viewers of this backdrop, many experienced technical traders eschew the event for the same reason that so few actually trade moving average crossover strategies, looking to get long simply because one moving average crosses above the other: The incredible lag that exists.

Case-in-point: The prior ‘death cross’ that showed up on the Dow was in mid-December, a full two months after last quarter’s selling really got started. It took time for the 50-day moving average to begin to turn-over and even longer for it to fall below the 200-day moving average: By the time it actually happened, the Dow was about a week away from setting it’s low. And of course, after that low was set, prices spent the next three months ripping higher until, eventually, the golden cross showed up.

Dow Jones Daily Price Chart: Death Cross (Red) and the Golden Cross (Blue)

DJIA Dow Jones Daily Price Chart

Chart prepared by James Stanley

Are Death/Golden Crosses Completely Worthless?

The lag from the crossover itself makes it a difficult event to define as ‘actionable’ given that, by the time it actually happens, prices have been trending in that direction for a while already. And like many other technical events, a trader learns it or sees it a few times, realizes that it doesn’t always ‘work’ and then moves on to further, more opportunistic studies.

But a bit of context can present some items of interest for strategy. The previous golden cross on the Dow took place in April of 2016 when the index was trading around the 18k level. After that crossover happened, prices continued to trend-higher for the next two years and eight months, until the December ‘death cross’ showed up. This amounted to a whopping gain of 49.91% and almost 9k points in the index.

But just before that, two signals that could be qualified as ‘not great’ appeared, shown in orange and purple on the below chart.

DJIA: Dow Jones Daily Price Chart

DJIA Dow Jones Daily Price Chart

Chart prepared by James Stanley

What’s the Takeaway From the Above Chart?

The takeaway is that moving average crossovers can work fantastically if a market will continue to trend; but not so much if they don’t. As with any other technical study, which is largely just examining the past, crossovers carry zero predictive capability; it merely highlights that strength has been increasing or decreasing of recent, and that it may, possibly continue in that direction. That’s really it.

So, while death or golden crosses might not be immediately actionable, they’re not completely worthless, either: They can be great ‘guides’ for trend that can get traders looking in a singular direction on a particular asset. In the case of the above scenario in the Dow, after the golden cross takes place on the Daily chart, traders can look at bullish setups on the four-hour or perhaps even hourly chart in the effort of trading bullish trend continuation while also mitigating risk afforded by the faster time frame and more granular pricing data. And if the trend doesn’t extend after the crossover, the trader can look at loss mitigation along with potential re-entry or reversal scenarios.

Dow Jones Current Backdrop

Incorporating all of the above into the current context, and this can be a difficult spot to look for fresh bullish exposure in the Dow Jones Industrial Average. RSI on the four-hour chart is moving into overbought territory, indicative of the recent run of strength in the index, and prices are nearing resistance areas that elicited some fairly strong bearish reactions just a few months ago.

DJIA: Dow Jones Four-Hour Price Chart, RSI Overbought Nearing Key Resistance

DJIA Dow Jones Four Hour Price Chart

Chart prepared by James Stanley

Traders looking to get long here, particularly on a bigger-picture basis, would essentially be looking for a re-test of November or December swing-highs. And while that, in-and-of-itself, isn’t all too outlandish, the risk that would need to be taken on would amount to a lackluster risk-reward ratio. The prior swing low in the Dow was around 25,200, or more than 800 points away; while that November high is less than 200 away. And to get all the way up to the all-time-high set in October, the Dow would need to stretch by approximately 900 points; and only then would the trader have a better than one-to-one risk-reward.

So, for traders that do want to get long, a bit of patience might be required. The resistance level looked at last Friday that had held before the most recent bullish breakout could be re-integrated into the approach. That level comes-in at 25,816 and this can be connected up to 25,895 to create a ‘zone.’ A pullback to this area can re-open the door to topside strategies with a more moderate risk outlay.

If that doesn’t hold support, there’s a second zone just underneath around the 25,600 level; and a third exists around the March swing low, which helped to cauterize support after a brisk sell-off showed-up earlier this month.

Dow Jones Four-Hour Price Chart

DJIA Dow Jones Four Hour Price Chart

Chart prepared by James Stanley

You may also be interested in:

Day Trading the Dow Jones: Strategies, Tips & Trading Signals

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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