S&P 500 Near ‘Golden Cross’ After 20% Rally: Technical Analysis

The Standard & Poor’s 500 Index is approaching the formation of a “golden cross” for the first time since 2010, historically a signal that more gains are likely to follow, Birinyi Associates Inc. said.

The benchmark index for U.S. equities has jumped 20 percent from its 2011 low in October as optimism grew that the world’s largest economy will withstand Europe’s debt crisis. The rally pushed its 50-day moving average to 0.2 percent away from exceeding the average price for the prior 200 days.

Technical analysts, who study price charts to predict market moves, call it a “golden cross” when a 50-day average moves higher than a 200-day average while both are rising, and say it shows a pickup in momentum that may herald more gains.

The S&P 500 has produced 16 “golden crosses” since 1962, 75 percent of which were followed by positive returns in the next six months, with gains averaging 4.4 percent, according to Birinyi.

“While we choose to disagree with many of the technical analysts’ forecasts and predictions, we would be amiss to not analyze the historical performance and patterns following this market event,” Kevin Pleines, an analyst with the Westport, Connecticut-based firm, wrote in a note today. “We have found that this technical indicator has some merit.”

There were 26 instances in the past 50 years when the S&P 500’s short-term average crossed above the long-term gauge, according to Birinyi. The index rose 81 percent of the time with an average increase of 6.6 percent in the next six months, the data show.

Stocks posted bigger returns when the S&P 500’s 50-day rose above a falling 200-day, Birinyi data show. The index jumped an average 10 percent over the next six months, according to the study.

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