5 ASX stocks displaying the “Golden Cross” (and 5 on the Death Cross)

The rivalry between the investment world’s “fundamentalists” and technical analysts is fiercer than the Growth versus Value investing divide. But for all of them, it’s ultimately the price of a stock that determines whether you make money or not. That’s according to Stuart McPhee - well-known Aussie trader and author of the book Trading in a Nutshell - who’s been earning a good living using the latter approach for more than three decades.

“We’ve seen too many examples over the years where share prices have fallen for three months, six months, two years and everyone, including the directors, scratch their heads wondering what’s going wrong,” says McPhee.

“And next thing, the directors are being prosecuted and investors and the market were entirely unaware. But the price reflected it and showed what was happening.”

McPhee describes his approach as one that uses the probability of what might happen when various patterns in share price movements occur as the basis for investing in ASX-listed companies.

“I speculate on that by making a trade – maybe over five or eight days. Do I care what the company is doing? Not really,” he says.

“If it’s a good company, prices will probably recover. But just in the next week or two, I’m going to take advantage of that and put on a trade.”

Two crucial points

McPhee emphasises that the major difference between his investing activity and that of portfolio managers is that he’s trading entirely with his own money. So, the risk is limited to his own personal wealth, with no “mum and dad” investors relying on – or crucially, paying for – anticipated investment returns.

“It’s definitely considered ‘black magic’ but there’s no denying that technical analysis can be incredibly effective,” McPhee says.

“Looking at price and volume, pricing action, patterns that repeat themselves…we understand the battle between buyers and sellers, know what’s going on and what people are thinking.”

And this is his other headline point: “We don’t have to agree with what [the market] is thinking. It doesn’t really matter, we just try to remain as objective as possible.”

This is a point McPhee emphasises throughout our conversation – the importance of having a dispassionate process that you, as a trader, stick to. As outlined at the end of this article, he learned a painful lesson about this early on.

But since his self-confessed days as a novice trader, McPhee says he’s been fortunate to have invested in many stocks that have delivered returns of more than 100% - and over periods of three, five and 10 years.

The stocks below were generated solely by the Golden Cross and Death Cross scanning tools – as found on Market Index. But McPhee says he  would never rely on any single metric, instead using a cross-section of up to 10 or more including:

• volatility-based screeners,

• volume check – to assess the liquidity of the stock

• rate of return

• separation between moving averages

• market breadth

• market sentiment.

McPhee also avoids trading in stocks that sit within the ASX’s worst-performing sector during any given period.

“Because it’s generally unable to sustain anything (a stock} that’s moving well, even if it’s going through a good patch of performance,” he says.  

The Golden Cross 

A "golden cross" is a chart pattern in which a relatively short-term moving average crosses above a long-term moving average or resistance level.

Market Index’s process for tracking share price trends uses what founder Matthew Gabriele describes as “a simple 50-day moving average”. This means the share price of a company being analysed is equally weighted on each day of this period. Another common approach is the “exponentially weighted” moving average, which places a higher weighting on share price data that’s closer to the date on which the analysis is being conducted.

As long-term indicators carry more weight, the golden cross indicates a bull market on the horizon and is reinforced by high trading volumes, indicating the potential for a major rally.

The Golden Cross gauges when the two simple moving averages – 50-day and 200-day – intersect at a point where the 50-day SMA is higher than the 200-day SMA.

The first table below shows five ASX-listed companies that experienced a Golden Cross in the previous five days – as of the market close on Monday 8 May.

Source: Market Index

The intersection of these moving averages for medical technology company 4DMedical (ASX: 4DX) is shown below.

4DX chart (Source: Market Index)

The Death Cross

This is a chart pattern reflecting recent price weakness. It refers to the drop of a short-term moving average - meaning the average of recent closing prices for a stock over a set period of time - below a longer-term moving average.

Source: Market Index

The intersection of these moving averages for Medical device form Polynovo (ASX: PNV) is shown in the table below.

PNV chart (Source: Market Index)

Golden Rule: Don’t bet the house

Circling back to an earlier point, I asked McPhee to describe the most disastrous experience of his trading career. Perhaps unsurprisingly, it occurred during the infamous “tech wreck”, when the NASDAQ bubble popped and the index fell precipitously between March 2000 and October 2002.

“It was pure greed, pure emotion with no analysis or objective thought. When the NASDAQ crashed and I’d lost a lot of money, then it bounced again and I threw more money back in, then it turned and fell even more a week or two later,” he says.

How much money?

He lost more than $100,000 which McPhee says was, at the time, enough for a modest house in some parts of the nation.

Lesson learned: The need for a rigid process.

“I couldn’t trade for the next six-plus months because I had no more money. And I vowed through that process that I would never, ever put myself in that situation again,” McPhee says.

He says it’s taken many years to develop the process and discipline, with these attributes not things people simply learn overnight.

“That’s the importance of adhering to those rules, which is what technical analysts do – try to completely remove the emotion to have a clinical, decisive, methodical process to work through.