A key aspect of any approach to futures trading is trend analysis. Being able to identify when a directional move in price is gaining steam or nearing exhaustion is a valuable skill for active traders. This is one area where technical analysis can be extremely valuable ― identifying and trading trending markets.
Two popular tools for trend study are the death cross and golden cross. Each is a confluence of moving averages, with the product signaling a possible market move. If you’ve casually heard the terms and aren’t overly familiar with their meanings, let’s take a closer look at them.
One of the quirks of technical analysis is the names of the indicators. Doji, evening star, Fibonacci retracements, and Gann Fans are a few of the more memorable. However, each pales in comparison to the ominous sounding death cross.
The death cross is a bearish chart pattern that indicates a major downturn or sell-off may be in the offing. It occurs when a security’s short-term moving average crosses below its long-term moving average. This technical event tells us two primary things:
Moving averages included in the death cross may vary according to the market and timeframe being traded. Among the most common are the 50- and 200-day moving averages, used specifically to monitor equities, currencies, and indices.
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The death cross resembles an “X” on pricing charts and has coincided with some of the most famous bear markets in history. Its mere appearance prompts media types and seasoned investors to warn of pending doom. Of course, like any other technical indicator, the death cross is fallible and best viewed within the context of a comprehensive strategy.
If you haven’t guessed by now, the golden cross is essentially the inverse of a death cross. It occurs when a security’s short-term moving average crosses above its long-term counterpart. Accordingly, a golden cross is a bullish indicator, and it’s frequently cited as being prima facie evidence of forthcoming strength in security pricing.
The golden cross forms as a result of a market bottoming out before posting a substantial rally. Given this scenario, the pattern furnishes technicians with a few pieces of vital information:
As in the death cross, equities analysts frequently use the golden cross to identify potential uptrends in asset pricing. Once again, the 50- and 200-day moving averages are commonly referenced, but periodicity may vary according to time frame and market.
Although the death and golden cross patterns are typically used to evaluate stocks, traders may apply them to futures trading. In fact, many active traders use them to monitor index futures products, such as the E-mini S&P 500, E-mini DOW, and USD Index. They do this for several reasons: