What is a golden cross?

In trading, a golden cross is a price chart pattern based on the relationship between a short term moving average and a longer term moving average. 

When long-term and short-term moving averages are plotted on a graph, the golden cross is the point at which the short-term average “crosses” above the long-term trend line. 

Typically, a golden cross means there’s bullish sentiment building around a particular asset with potential for strong upward movement. 

How to identify a golden cross

In order to spot a golden cross in trading, traders must first track two moving averages. In many cases the 50-day moving average and the 200-day moving average will be used. 

In order for a golden cross to occur three things must happen. The short-term average must trend downwards for a period of time and fall below the long-term average trendline. 

This downward trend should slow as ‘sell’ sentiment reduces before eventually turning upwards. After falling below the long-term average, the short-term average must enter a clear bullish uptrend where it crosses back above the long-term trendline. 

This is the moment when you define the golden cross. The final stage would be for the short-term average to sustain this higher level and the long-term average to act as the support level for the asset price. 

Golden cross example 

An example of a golden cross in late 2021 is for Tesla, where the 50-day moving average just surpassed the 200-day for the first time since 2019. The last time this occurred for Tesla stock it signaled the start of a substantial bull run, which saw the price soar over the following years. 

The opposite to a golden cross is referred to as a death cross. The difference between a golden cross and a death cross is that in a death cross the short-term average drops below the long-term average, signifying bearish sentiment and perhaps a strong downturn in the price. 

Golden cross reliability

Some investors believe the golden cross represents one of the strongest indications of a future bull run. In historical terms, the metric has accurately predicted the near-term trend for stocks and indices. 

While the golden cross has proven to be a fairly good indication of market sentiment, short-term blips can affect the ability of the technical pattern to predict longer term results. For all the times the metric has successfully predicted a bull run, there are also many examples of when a golden cross failed to identify substantial upcoming losses. Metrics such as the golden cross should be confirmed through other indicators and fundamental analysis to ensure they are telling the whole story.