What is a cross?
You place two moving averages on the chart, a short one and a long one. The common pair is the 50-session and the 200-session average, though you will see other pairs too. When the short average rises above the long one it is called a golden cross. When the short one falls below the long one it is called a death cross.
A golden cross describes that the recent average price has moved above the longer-run average. A death cross describes the opposite. It describes a move that has already happened; it does not announce the next one.
Why does the cross come late?
A 200-session average holds prices from more than 9 months. To move, it needs many new prices to shift it. By the time the short average catches it, the price itself has travelled a long way.
When the market moves sideways
If the price drifts in a narrow range with no clear direction, the two averages converge and keep crossing back and forth. You may then see a golden cross followed a few weeks later by a death cross, and neither describes any real trend.
See the averages on a chart
Open any stock on FoudaLens, switch on two averages with different periods, and find the last time they crossed. Compare the price at the cross with the nearest low or high before it.
Check yourself
1. The 50 average fell below the 200 average. What is it called?
2. The low was EGP 5 and the golden cross came at 6. How far above the low was price?
Summary
- Golden cross: the short average rises above the long one. Death cross: the reverse.
- A cross always comes after price has moved, because a long average is slow by nature.
- In a sideways market crosses multiply and describe no real trend.