Another ‘Golden Cross’ May Be Coming Soon

0
743
Another 'Golden Cross' Is Coming This Week

April began with a “golden cross” in the S&P 500. Early May could see a similar pattern in the Russell 2000.

In case you don’t know, a golden cross is when a chart’s 50-day moving average rises above its 200-day MA. It’s often viewed as a sign that momentum is turning more bullish.

Russell 2000 futures (@RTY) have their 50-day moving average at 1567.88 and the 200-day MA at 1577.17. Their current trajectories suggest they’ll cross by early next week. The iShares Russell 2000 ETF (IWM), better known to many clients, is behaving the same.

Russell 2000 (@RTY) with moving averages, automated strategies and Bollinger Bands.
Russell 2000 (@RTY) with moving averages, automated strategies and Bollinger Bands. Prices reflect Monday’s close.

Similar to the pattern with the S&P 500, golden crosses seem to be a relevant signal for the Russell 2000 historically. TradeStation’s strategy backtesting shows the pattern occurring nine times since 2001, followed seven times by moves higher. The average increase was also bigger than the typical decline. (See the Strategy Performance Report below.)

What The Russell Means

The Russell 2000 index focuses on companies with lower market capitalizations than members of the S&P 500 or Nasdaq-100 indexes. Investors typically associate it with the U.S. economy because those smaller companies often have less overseas revenue.

As a result, it can outperform other benchmarks when the U.S. dollar rises strongly versus other currencies. That last happened between May 2016 and January 2017, followed by about two years of underperformance as money returned to large-cap growth stocks.

But now the U.S. dollar has pushed to new highs as economic growth in the U.S. improves. Last week’s first-quarter gross domestic product was so positive that many commentators brushed it off as a statistical fluke.

The market has at least two opportunities to give its opinion this week. Tomorrow, Federal Reserve Chair Jerome Powell will release the central bank’s policy statement and hold a press conference. No one expects a rate change, but signals in either direction could move the U.S. dollar.

Second, non-farm payrolls Friday morning could also have a big impact on the greenback and sentiment toward the economy.

In conclusion, big-company indexes like the S&P 500 and Nasdaq-100 have pushed to new all-time highs. Meanwhile, the Russell 2000 has squeezed into a tight range as its macro conditions and technical patterns improve.

Strategy Performance report for the chart shown above. Note it refers to futures, which represent $50 per point.

Strategy Performance report for the chart shown above. Note it refers to futures, which represent $50 per point.
Advertisement