From Bearish to Bullish Trends: How the Golden Cross Reveals Opportunities in the Markets

Technical analysis in financial markets relies on multiple tools and indicators, each designed to detect patterns and changes in asset price directions. Among the most effective strategies for long-term investors is the Golden Cross, a model that combines simplicity and power in identifying significant transitions between bearish and bullish cycles.

▶ Fundamentals of the Golden Cross: Moving Averages in Action

To understand how the Golden Cross operates in markets, it is essential to start with the basic concept: moving averages. These are values calculated continuously based on the average prices over a specified period. The two most commonly used variants in technical analysis are the SMA (Simple Moving Average) and the EMA (Exponential Moving Average).

The simple moving average, or SMA, works by taking the arithmetic mean of closing prices over X number of days. For example, if we set a 5-period SMA on a daily chart, the indicator will calculate the average of the last 5 days’ closing prices. If the prices were 3864.7, 3836.5, 3943.1, 3952.1, and 3988.8, the sum divided by 5 gives us 3917.04, which is precisely where the line is positioned on the chart.

This indicator allows traders to identify the prevailing trend of an asset more clearly and anticipate possible changes in its direction.

▶ The Golden Cross: When the Short Moving Average Surpasses the Long

The Golden Cross, or golden cross in Spanish, is a crossover pattern between two moving averages that signals the emerging strength of an upward trend. It occurs when a short-term moving average crosses above a long-term moving average. This event marks an inflection point where buying momentum begins to dominate after a phase of weakness.

When the Golden Cross occurs, we are witnessing a qualitative change in market dynamics. Selling exhausts itself, price averages converge and finally cross. At that moment, we can affirm that the asset has transitioned into a bullish environment with considerable momentum. What typically follows are minor retracements that find support at the same short-term moving average, allowing the upward trend to continue until a Death Cross occurs (Death Cross).

▶ Optimal Setup: 50 and 200 Periods

Not all combinations of moving averages are equally effective. Technical trading experts suggest specifically using the 50-day SMA and the 200-day SMA to implement a reliable Golden Cross strategy.

The reason is simple but powerful: the 200-period average analyzes behaviors over approximately a full year of trading, capturing long-term cycles and sustained movements. The 50-period average, on the other hand, reflects the last two months of activity. When the latter surpasses the former, it is a very strong indicator that the bullish trend is not just short-term noise but a real market reconfiguration.

Using 15 and 50-period moving averages, on the contrary, would generate an excessive number of buy and sell signals, many of which would result in false reversals. The effectiveness of the Golden Cross lies precisely in the quality of signals, not their quantity. Few reliable crosses significantly outperform many doubtful ones.

▶ Practical Application: The Case of the S&P 500

To illustrate the effectiveness of the Golden Cross in real trades, nothing beats a documented example. The S&P 500 index experienced its last golden cross in July 2020, when it was trading at 3,151.1 USD. This was the exact moment to open a long position.

In the following months, the index showed sustained bullish movement. The 50 and 200 moving averages acted as dynamic supports: the 50 with less precision, but the 200 showing remarkable effectiveness. The price repeatedly bounced off these lines, reinforcing the trend.

In January 2022, the candles began closing below the 200-day moving average. The S&P 500 was trading at 4,430 USD. This was the optimal exit point. With a single position opened since the golden cross, a profit of 1,278.9 USD could have been generated over 18 months.

Just two months later, in March 2022, the death cross occurred, confirming the shift to a bearish environment. The market now positions itself at the cycle’s bottom, where waiting again for a Golden Cross offers valuable opportunities for long-term investments.

▶ Confluences: The Necessary Complement

Although the Golden Cross is a robust model, it is not infallible. Immediately after the crossover occurs, the market could turn again into a bearish territory, generating a false signal. To significantly improve the success rate, it is advisable to look for additional confluences.

In the S&P 500 example, after the July 2020 Golden Cross, a bounce was observed at the Fibonacci level 0.618 when projected from the previous minimum and maximum. Additionally, there was a previous resistance that had turned into support at 3,229 USD. These multiple convergences transformed the Golden Cross entry into a much more solid opportunity.

Integrating more comprehensive technical analysis through additional indicators, historical resistance and support levels, or even fundamental analysis, greatly reduces the probability of false signals.

▶ Death Cross: The Inverse Mirror

The death cross is the negative counterpart of the Golden Cross. It occurs when the 50-day moving average falls below the 200-day moving average. Although the name suggests something catastrophic, the Death Cross is simply a tool for operating in short positions or closing long positions.

It is important to note that the Death Cross does not have the same effectiveness in stocks and indices as the Golden Cross, since these markets are historically bullish. A death cross in these assets typically signals the closing of long positions rather than the start of new short positions.

The Death Cross shows greater effectiveness and reliability in forex (Forex) markets and cryptocurrencies, where sustained bearish cycles are more common and longer-lasting.

▶ Adaptability According to Timeframes and Assets

The effectiveness of the Golden Cross depends significantly on the timeframe in which the market is analyzed. This indicator is designed to be implemented on daily charts, not on 1-hour or 15-minute frames. If you apply 50 and 200 moving averages on a 1-hour chart, you will be analyzing averages of 50 and 200 hours respectively, which completely distorts the original purpose of the strategy.

Similarly, the Golden Cross works optimally on assets that exhibit long and stable trends: quality stocks, broad stock indices, commodities with clear cycles. Highly volatile assets or those with lateral behavior will constantly generate false crosses and contradictory signals.

▶ Limitations and Realities of the Indicator

There is no trading strategy or technical indicator that is 100% accurate. The Golden Cross, despite its apparent simplicity, is no exception. Its effectiveness increases when combined with other tools, when longer analysis periods are used (longer moving averages provide more reliable data), when assets with very clear trend histories are selected, and when complemented with fundamental analysis.

The key is to accept that every Golden Cross signal requires additional validation before committing capital. Traders should also consider commissions and overnight financing costs, especially when positions remain open for weeks or months.

▶ Conclusion: Opportunities in Market Cycles

The Golden Cross is a simple yet remarkably powerful instrument when implemented according to parameters suggested by technical analysis experts: moving averages of 50 and 200 periods, analysis on daily charts, seeking additional confluences, and selecting assets with stable trends.

Bearish phases are not periods to fear but windows where the market prepares its next golden crosses. Patient investors who can recognize and wait for these opportunities, integrating them into a broader long-term strategy, gain significant profits with controlled risk.