It should be time for celebration on Wall Street. A bullish golden cross is on the verge of materializing in the 122-year-old Dow Jones Industrial Average, coming after an anxiety-provoking dip more than two months ago.
However, the formation, which is widely viewed as an upbeat signal, comes amid a torrent of market indicators suggesting stocks aren’t entirely primed to explode substantially higher and could even break lower.
As of Thursday, the Dow’s DJIA, -0.78% 50-day moving average was at 24,736.36, while the gauge’s 200-day moving average was at 25,125.81, FactSet data show. At current levels, the short-term average is just about 390 points, or about 1.6%, short of crossing above the longer-term average.
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Many technicians believe that when the 50-day average crosses above the longer-term 200-day line, that this relatively rare event marks the point where a shorter-term rebound morphs into a longer-term uptrend.
A death cross, where the 50-day falls beneath the 200-day, forming a bearish chart pattern, occurred back in December, with that downtrend culminating in the broader U.S. equity market’s suffering the worst trading day before Christmas ever.
Since then the Dow has been in ascent, gaining 16.9% since that Christmas Eve nadir, while the S&P 500 index SPX, -0.81% has climbed 16.9% and the Nasdaq Composite COMP, -1.13% has rallied 20% over the period.
More recently, however, the path of least resistance for stocks has been lower, amid growing fears that recent policy pivots by central banks in Europe and the U.S. may further highlight the cracks already showing in the global economy.
On Thursday, the European Central Bank unveiled plans to deploy additional stimulus, raising fresh worries about the health of the eurozone, with Italy in recession and Germany’s economy under pressure. The ECB’s move comes weeks after the Federal Reserve, citing concerns about economic contraction abroad, halted its rate-hike initiative.
The Fed’s decision had initially given investors reason to push stocks upward because it had signaled to some that policy makers were being responsive to signs of tightening financial conditions and sluggish growth that could have knock-on effects domestically. However, the convergence of dovishness from global central banks may be eroding confidence that the investing climate in the U.S. will remain a favorable one.
Indeed, the Dow and the S&P 500 have fallen in seven of the past eight sessions, including Thursday’s retreat. And the Dow Jones Transportation Average DJT, -0.96% often used as a barometer of the health of the U.S. economy, notched its longest losing streak in about a decade, at 10 consecutive sessions, at Thursday’s close, matching a stretch ended Feb. 23, 2009, according to FactSet data.
As for the golden cross, John Kosar, chief market strategist at Asbury Research, told MarketWatch that the golden cross is a good indicator to signal to investors what has already happened but isn’t as predictive in the short and near terms.
“Death crosses and golden crosses for me are like the wake of a battleship crossing the wake of an aircraft carrier,” the technical analyst said. In other words, by the time one of those patterns forms they may not be useful as a guidepost forward. “Those are two big boats that take a long time to make a turn [and] it’s really late by the time they cross,” Kosar said.
Kosar said that he’s looking at the S&P 500’s failure to hold above a psychologically significant level of 2,800. After finishing above that level on March 1 for the first time in months, the broad market benchmark has stumbled — a potentially ominous sign, according to the Asbury analyst. He said that the key level to watch now is 2,750, with failure to hold above that now possibly leading to further selling and pushing stocks to 2,675.
“I can see we’re starting to come into a golden cross [on the Dow], and that kind of tells me more about momentum than it does about what is going to happen this week or next week,” he said.
Katie Stockton, technical expert and founder of Fairlead Strategies, took it one step further, adding that she believes that despite the gains stocks have enjoyed in the past two or three months, they remain in a downtrend. “The risk,” she told MarketWatch, “is still pretty high.”
Stockton said intermediate volatility in markets also makes it challenging to determine whether equities are in a bottoming process, where a lower low — lower than the Dec. 24 nadir, that is — could result.
One upbeat indicator for Stockton would occur if the market falls but remains above that Christmas Eve low.
She relies on CNN’s Fear & Greed index as a further tool that shows Wall Street could be susceptible to a further downdraft. That index, ranging from 0 to 100, with readings below 50 pointing to more fear than greed, is showing a reading of about 59; it was at 72 last week. Stockton said she uses it as one contrarian measure that can signal short- to intermediate-term overbought or oversold conditions in the market.
As for the Dow, Friday’s jobs report could be an important point for Wall Street.
“It could be a decision point for the market,” Kosar said.
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