While a lot of the business of investing involves looking at a company's business model, financials, and other fundamentals, there are also a lot of investors that focus on the technical aspects of a stock chart in order to determine whether to buy a stock.
This often involves analyzing different moving price averages of a stock and looking for signals that indicate a buying opportunity is near.
One of those signals is called the golden cross. To show an example of how this signal works, let's use the very popular tech and e-commerce stock Amazon (AMZN +1.36%) and look at the last time Amazon's stock experienced a golden cross.
What is a golden cross?
During a golden cross scenario, the short-term moving average of a stock will cross its long-term moving average, indicating a bullish trend. While you can use different data points, investors typically use a 50-day moving average price to represent the short-term trend and a 200-day moving average for the long term.
The golden cross typically plays out in three different stages. The first signal will be during a downward trend when the short-term moving daily average is underneath the long-term moving average. This is actually known as a death cross, but the first stage of a golden cross begins when the short-term average stops moving downward and reverses course.
The second phase is the actual formation of a golden cross where the 50-day and 200-day moving average lines crisscross, and the third phase is when the short-term moving average not only surpasses the long-term moving average but continues to move higher and potentially even widens the gap, solidifying a bullish trend.
All of that said, the important thing to remember about a golden cross is that it is based on what has already happened with a stock. As we encourage investors to remember: past performance is not a guarantee of future results.
When was Amazon's last golden cross?
So when was the last time Amazon saw a golden cross? According to the chart, not too long ago, actually.
AMZN 50-Day Exponential Moving Average data by YCharts
In recent months, Amazon has been rising on the back of solid first-quarter earnings results, in which the company delivered earnings of $15.79 per share on total revenue of $108.5 billion, easily beating analyst estimates for the quarter. Amazon also saw its profit margins increase.
Amazon has also been benefiting from the broader rally in large tech stocks, which have rebounded this year and are moving higher from the artificial intelligence craze. The company is believed to be able to take advantage of this trend.
NASDAQ: AMZN
Key Data Points
What you should do about it now
While the golden cross is a proven trading pattern, I do want to remind investors that it is not a bulletproof signal of whether to buy a stock. The big reason is that the golden cross is based on past data, meaning it has already happened and doesn't necessarily guarantee that the trend will continue.
At the end of the day, the golden cross is really used by those traders focused on short-term gains. While plenty of investors have made money this way, you really need to know what you are doing if you are going to try this strategy. Investing for short-term gains is difficult because it's hard to time the market.
At the Motley Fool, we really focus on long-term investing. While it may not always be as exciting, the strategy has been proven to greatly grow your wealth, so while you should certainly try different investing strategies, I wouldn't rely too heavily on the golden cross.
