Why the Golden Cross and Death Cross Do Not Work

A golden cross or death cross is an event when a short-term moving average crosses a long-term moving average from below (bullish signal) or from above (bearish signal). Here’s why they should not be acted upon.

  • Matthias Hagemann
    Matthias Hagemann
  • Trading Strategy

  • Updated October 15th 2020

The Golden Cross or Death Cross is often considered a confirmation of an existing bullish upward movement or bearish downward movement, respectively. Traders like to find these technical signals as a reassurance to the long-term direction of an asset price.

For example, the most popular scenario is for the 50-day moving average and the 200-day moving average to cross in order to confirm a change of market sentiment. It’s like an official declaration of a trend’s reversal.

In below chart, you can identify several marked occurrences of a Golden Cross and a Death Cross in the S&P 500 stock market index.

Golden Cross and Death Cross in the S&P 500

You can see that, with the exception of one Death Cross (bearish signal) in 2008, all Death Crosses eventually resulted in a loss as the market rebounded shortly thereafter and never embarked on a sustained downward movement.

A trader would have been far better off, taking only Golden Crosses (bullish signals) because the general market tends to move upward in the long-term. You are also not protected against whipsaws which happen periodically during market uncertainties. Whipsaws can be observed in the years 2010, 2012, and again in 2015 when multiple reversal signals presented themselves.

Furthermore, these signals carry an inherent delay which means that they are triggered long after a trend has already established itself. Instead of giving you foresight, these moving average crosses seem to be a signal for the hindsight.

Let’s take a closer look at the trading signals and backtest them as if you had traded them in a realistic scenario. I’m presenting you three different scenarios and how a $10,000 investment has evolved in each:

Long-Only Strategy

Buy Golden Crosses at the first closing price when the 50 EMA crosses above the 200 EMA and close the position at the first Death Cross.

Open Open Date Close Close Date Return
99.73 2009-08-11 107.96 2010-07-09 8.25% $10,825.23
112.76 2010-08-02 105.53 2010-08-24 -6.41% $10,131.13
113.05 2010-09-16 119.67 2011-08-17 5.86% $10,724.39
128.04 2012-01-05 191.77 2015-09-01 49.77% $16,062.30
205.62 2015-11-16 191.92 2016-01-08 -6.66% $14,992.10

Short-Only Strategy

Sell short Death Crosses at the first closing price when the 50 EMA crosses below the 200 EMA and cover at the first Golden Cross.

Open Open Date Close Close Date Return
138.91 2008-01-08 99.73 2009-08-11 28.21% $12,820.53
107.96 2010-07-09 112.76 2010-08-02 -4.45% $12,250.52
105.53 2010-08-24 113.05 2010-09-16 -7.13% $11,377.55
119.67 2011-08-17 128.04 2012-01-05 -6.99% $10,581.78
191.77 2015-09-01 205.62 2015-11-16 -7.22% $9,817.55
191.92 2016-01-08 208.00 2016-04-13 -8.38% $8,994.98

Long-Short Strategy

Take every signal and risk whipsaws.

Open Open Date Close Close Date Return
138.91 2008-01-08 99.73 2009-08-11 28.21% $12,820.53
99.73 2009-08-11 107.96 2010-07-09 8.25% $13,878.52
107.96 2010-07-09 112.76 2010-08-02 -4.45% $13,261.47
112.76 2010-08-02 105.53 2010-08-24 -6.41% $12,411.16
105.53 2010-08-24 113.05 2010-09-16 -7.13% $11,526.75
113.05 2010-09-16 119.67 2011-08-17 5.86% $12,201.73
119.67 2011-08-17 128.04 2012-01-05 -6.99% $11,348.32
128.04 2012-01-05 191.77 2015-09-01 49.77% $16,996.77
191.77 2015-09-01 205.62 2015-11-16 -7.22% $15,769.23
205.62 2015-11-16 191.92 2016-01-08 -6.66% $14,718.56
191.92 2016-01-08 208.00 2016-04-13 -8.38% $13,485.37

You may now conclude that the long-only strategy yielded the best performance. Wait until you see how a simple buy-and-hold approach would have fared with much less stress.

Let’s assume you had simply bought at the first Golden Cross on August 11, 2009. As of April 13,2016 (the last action taken in any of the above tables), your initial $10,000 investment would have turned into $20,856.31 (a 108.56% return excluding dividends).

Conclusion

In conclusion, we can say that neither the Golden Cross nor the Death Cross are a reliable signal which you should base your trading strategy on. Trading with them does not seem like a profitable proposition in comparison with a less active buy-and-hold approach.

Since we depicted over 8 years of historical data in the example above, one could argue that the signals should be backtested with much more data, but we think that they are already representative as the general stock market (i.e. S&P 500) tends to move upward historically with infrequent turmoils in between.

We even gave a generous benefit of the doubt to the short strategy by including the enormous sell-off during the Great Recession. But after an initial success, the stock market gradually chipped off the handsome profits of the short-only strategy.

You can use moving averages in a different, more profitable way. A trend following strategy that you learn here gives you the tools to pick up stocks when they’re right at their historic bottom.

The strategy allowed us to buy into unique opportunities with American Express at their 2016 lows and Apple at their 2018 lows. When share prices eventually bounced back, we had a serious competitive edge against market averages.

Matthias Hagemann
Matthias Hagemann
Matthias’s career spans over a series of financial institutions. Trend following became a focus topic when he wrote his senior thesis on “The Psychology of Financial Markets”. He is portfolio manager at Hagemann Capital, a high-conviction investment fund.

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