There is no single magic signal that will tell you when to buy a stock or index.
However, the golden cross has proven to be one of the more reliable, although not infallible indicators.
The pattern is formed when a shorter-term moving average, most commonly the 50-day moving average, crosses above the longer term 200-day moving average. The trend, coupled with strong trading volume is seen as a key indicator of bullishness left ahead and can help mindful investors ride a continued upward trend.
Additionally, with algorithmic trading becoming an ever more dominant trend, the technical factor can spark added buying pressure and cement that trend.
For a concrete example, the S&P Homebuilders index (XHB) - Get Report formed a golden cross pattern after rosy reports from KB Home (KBH) - Get Report and Lennar Corporation (LEN) - Get Report in late March. After crossing that line, the index ran nearly 10% to the upside in just the next week. Not a bad time for chart-watching traders.
For a quick explainer on how to spot the pattern forming and what it means for investors, check out the video above.
For more in depth analysis of individual stock chart readings and a slew of other chart patterns to watch, head over to Real Money for daily insights from Market Technician Bruce Kamich.
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