Category Archives: Golden Cross
After further analysis, I’ve decided that the results of the last post, Dow Jones Golden Cross and the S&P 500 Has Not Crossed – Lackluster Year Ahead?, are not robust. I believe the results are a function of randomness (part and parcel of a small sample size) and the way I structured the test.
I was still intrigued though, and so I changed the test a bit. The new test trades the S&P 500 anytime that the Dow Jones completes a Golden Cross, as long as the S&P’s 50 day moving average is less than its 200 day moving average (just like the last test). Here is what I changed: Rather than holding the trade for X number of days, the S&P position is sold whenever the Dow Jones completes a Death Cross. Basically this setup is trading the S&P 500 rather than the Dow Jones, using the Dow’s GC signals, with the exception that we are buying the S&P when it has not yet completed a Golden Cross. Anyone confused yet?
All the results below do not account for commissions or slippage. Data used goes back to 1960 for both indices.
Using this method yielded these results for $SPX:
- Compound Annual Return = 1.60%
- Average number of days held per trade = 200.57
- Average trade profit or loss = 9.64%
- Win % = 42.86%
- 14 trades
- Sharpe = 0.26
These results are significantly better than the results generated when NOT using the $DJI Death Cross as an exit signal.
Let’s compare the above results to the Dow Jones Golden Cross results (simply trading the $DJI based on the GC buy signal and selling it on the Death Cross):
- Compound Annual Return = 4.72%
- Average number of days held per trade = 216.42
- Average trade profit or loss = 8.36%
- Win % = 55.26%
- 38 trades
- Sharpe = 0.31
And finally, let’s look at the S&P 500 Golden Cross traded with $SPX and selling on the Death Cross:
- Compound Annual Return = 6.21%
- Average number of days held per trade = 324.58
- Average trade profit or loss = 14.73%
- Win % = 80.77%
- 26 trades
- Sharpe = 0.41
The bottom line is that you don’t want to trade $SPX using $DJI Golden Cross signals. Furthermore, if you are into long-term trendfollowing, you probably want to ignore a $DJI GC and wait for a $SPX GC. At this time, I cannot determine any conclusive evidence why the $DJI crossing before the $SPX is bad. It still seems like it should be, though
Thanks to the two or so readers who have followed me down this rabbit hole. I can tell by traffic that this series has not been very popular. I’ll promise to move on to more exciting things!
The previous post took a quick look at what happens one year later with the S&P 500 when the Dow Jones completes a Golden Cross before the S&P 500. This post will look back farther in hopes that we might draw some conclusions about what this might mean for the next year.
I continue to look for what it might mean when the Dow Jones is outperforming the S&P 500. This test will use more than 60 years data from the S&P 500 and Dow Jones.
Buy the $SPX at the close if
- the Dow Jones ($DJI) completes a Golden Cross
- and the S&P 500′s 50 day moving average is beneath its 200 day moving average
The trade will be held for one year. No commissions or slippage included.
There were only 11 trades held the full 252 days for the setup (blue line) so sample size is very small. The first trade was on December 26th, 1962. We can see that this setup yields an average trade that is right at %0.0, after 252 days. This is not good. I suspect most randomly selected 252 day periods from $SPX would yield significantly better returns than the setup.
For the sake of comparison, I included all the Golden Crosses on $SPX, with the first trade taking place in 1963 (red line). There were 22 trades held the full 252 days. After 252 days, the average return is near %11.5. Obviously, this is a huge improvement over the setup.
I’m still not sure why the S&P 500 can barely muster a gain a year after a Golden Cross on the Dow Jones. It seems that the S&P 500 would follow in the footsteps of the Dow Jones and complete its own Golden Cross. The test above shows that might not be the case.
There is more work to be done here. I am seriously intrigued why a Dow Jones GC when the S&P 500 has not yet crossed has generated a neutral S&P performance after a year.
I ran a quick study while enjoying my cup of coffee this morning. The results were not at all what I had expected, so I’m putting up a quick post. More analysis will be forthcoming.
I wanted to look at what happened after the Dow Jones completed a Golden Cross before the S&P 500. What would happen if you bought SPY to get a jump on the inevitable SPY Golden Cross. In other words, rather than waiting for the actual S&P 500 cross, you acted on the Dow Jones Golden Cross, but bought the S&P 500 (and substituted SPY for the S&P).
Not very pretty, eh? I was really surprised at how bearish this turned out to be. The trade by trade results on SPY show that this setup has had one buying SPY primarily during the bear markets of the last decade.
I will put some more time into this study this evening. The first thing I will do will be to use the data from the actual indicies ($DJI and $SPX) rather than the ETF data in order to look back further. The above results reflect 7 trades held for the full 252 days.
Have a great Friday!
Soon we’ll have a Golden Cross on the S&P500.
I have written about this numerous times, but it is always fun to revisit.
- Buy the SPY at the close when the 50 day simple moving average crosses above the 200 day simple moving average.
- Sell the open SPY position at the close when the 50 day simple moving average cross beneath the 200 day simple moving average.
No commissions or slippage were used in the test.
I find it interesting that the last exit from the Golden Cross was pretty horrible. I’ve included a chart below of the entry and exit. Note that the exit was almost at the exact low of 2010.
All in all, this setup remains appealing and will likely continue to maintain a prominent position in trend-following lore.
Of course your best resource to understanding what the Death Cross may or may not mean will be my post made almost 1 year ago to the day (the first link, naturally), but I have also included some other helpful articles on the Death Cross. Beware the financial pundits who are long on Death Cross market lore but short on statistics.
I have wracked my brain over this holiday weekend trying to figure out where my research might have gone wrong. I mean there are still many traders who still believe it is better to buy a Golden Cross with a rising 200dsma than a falling 200dsma. I have checked and re-checked my code, re-reviewed the data set, and visually inspected the trades. I can find no errors.
I decided to run one final battery of tests on the SPX data to nail shut the coffin from which the zombie disbelievers keep trying to rise.
First, anyone new to this series will need to review the following posts in order to understand the testing methodology:
Results with Rising 200dsma
Results with Falling 200dsma
In Case There is Still Doubt…
The zombies have been fixated on the myth that a Golden Cross with a rising 200dsma is the ONLY version of the technical signal that is valid as the herald of a new Bull Market.
To test this assumption, I quantified rising/falling in the most simplest terms possible. If on the day of the cross the 200dsma was lower than the day before, it was considered to be falling. If on the day of the cross the 200dsma was higher than the day before, it was considered to be rising. In other words, this test used a 1 day look-back. The traditional exit, the Death Cross, was kept as the exit.
I assume, by a new Bull Market, the zombies mean (of course they never bother to quantify their arguments) that a Golden Cross with a rising 200dsma will tend to run much farther than when the setup has a falling 200dsma. Again, the specifics have never been quantified, so I will do my best to work with the soft arguments.
To measure how far the trade runs, I used Maximum Favorable Excursion. This measure shows the maximum gain of the trade. It does not show what each trade gained from open to close. It is a perfect-world type measure. Maximum Favorable Excursion shows what the gain for the trade would have been had you closed it at the most favorable moment.
Lets look first at how the MFE looked on the Dow Jones.
With a rising 200dsma, only 1 trade rose more than 50%, and 4 trades rose more than 30%.
With a falling 200dsma, 3 trades rose more than 50%, and 6 trades rose more than 30%.
Again, without an operational definition of “New Bull Market,” it is hard to disprove the argument, although it sure looks to me like a falling 200dsma yields a better chance for trades that run higher.
MFE on the SPX
With a rising 200dsma, only 2 trades rose above 20%, with one of the trades barely making it above 20%. It is obvious that the bulk of the gains from the rising 200dsma trades came from the outlier trade which gained over 120%.
With a falling 200dsma, 5 trades rose greater than 20%.
It should be obvious at this point that a greater number of trades with a falling 200dsma go higher (new Bull Market?) than trades initiated with a rising 200dsma.
Across a variety of measures, the data show that there is a definitive edge to buying a Golden Cross with a falling 200dsma a 200dsma that has fallen more than it has risen. Indeed, whether we are looking at average trade, % profitable, or net profit, a falling 200dsma a 200dsma that has fallen for longer than it has risen performs equally as well or better than a rising 200dsma.
As for the claims that a falling 200dsma is “false” as the herald of a new Bull Market, the data again show this to be another myth. However, I am almost certain that the zombies will say that I do not understand the meaning of “Bull Market.”
As always, discussion/challenges are welcome.
I am truly surprised at the amount of misinformation put forth lately in regards to whether a Golden Cross with a downtrending 200 day simple moving average (dsma) is a valid signal.
Despite the work of backtesting heavyweight MarketSci (not to mention my own work) which showed that it does not matter whether the 200dsma is falling or not, there are still many people out there who insist that this variety of Golden Cross is invalid. Across a variety of blogs and websites this myth remains very persistent.
Not being one who is fond of promulgating more technical analysis myths (there are enough out there already), I have decided to put this myth to bed, once and for all.
Both Michael Stokes and myself have proven that a Golden Cross on the S&P500 is valid regardless of the direction of the 200dsma. Despite our efforts, there has been some doubt about this research since data for the S&P only goes back to 1960. Some have asserted that this test should be performed on the Dow Jones, since there is more data available.
The other important consideration is how “downtrending” or “falling” is quantified, in regards to the 200dsma.
I will test all of the Dow Jones data provided by Tradestation, going back to January 1, 1920. Secondly, I will quantify “downtrending” and “falling” so that my results can be replicated.
My tests will not include commissions or slippage or any other fees. It will also not give a return on the cash held when the system is in between trades. Starting equity is 100K and gains are compounded.
In return for my hard work, you dear reader will agree to provide the link to this post to whomever puts forth this myth, from this day forward.
Quantifying Downtrending and Falling
The 200dsma will be defined as downtrending or falling by using 6 different look-back periods: 1, 10, 25, 50, 100, and 200 days. Specifically, six separate tests will be run. Each test will use a different look-back. The first test will consider the 200dsma to be falling if it is lower than it was 1 day ago. The second test will consider the 200dsma to be falling if it is lower than it was 10 days ago, and so on and so forth.
If the 200dsma is lower than it was on the look-back day AND the 50dsma has crossed above the 200dsma, a trade will be entered at the close. The exit takes place on the close of the day the 50dsma crosses beneath the 200dsma.
Analysis of Results:
After completing a few of these tests and seeing the trend, I had a true “rolling on the floor laughing my a$$ off” moment.
The “technical analysts” were exactly wrong about buying a Golden Cross with a falling 200dsma. In fact, performance improves as the look-back period increases. In other words, the longer the 200dsma has been downtrending, the better!
The two graphs above show that it is better to buy a Golden Cross when the 200dsma is falling, flat, or just beginning to rise. The longer it rises, the greater the decrease in the average trade and the percentage of winners (percentage of winners not graphed).
The equity curve is generated from the 50 look-back period test. I have posted it here primarily because I think it is important to examine equity curves as they show details that the statistics do not illustrate nearly as well.
I’m willing to entertain any well-reasoned and insightful challenges as to why I have not busted this well-publicized technical myth. No matter how it is sliced, the Golden Cross is bullish, but like everything else market related, there are no guarantees this cross will be successful and lead to a multi-month rally.
It is important to note that a Golden Cross took place today (July 2) on the Dow Jones. The 200dsma has been falling for more than 200 days. As such, the cross that occurred today has the highest probability of success, as shown in the results posted above.
***Update*** While I had hoped to entertain comments here, it looks like the discussion has moved over to Denninger’s forums. Put on your boots before you visit, as it gets a little deep over there.