Getting the Market Right: Ryan Fitzwater on How to Spot a Golden Cross

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club

Editor’s Note: This video was taped back in April. It uses a golden cross on a particular stock as an example, but that movement may no longer be relevant to the stock’s trajectory. Please use this video as an educational resource, not as an active investment recommendation.

Transcript:

SM: Our guest this week is The Oxford Club’s Director of Research, Ryan Fitzwater. He’s here to talk about moving averages and how they define a golden cross. What are moving averages, and what is a golden cross?

RF: It’s a great question, Steve. After I perform fundamental analysis on a stock I like, I use a momentum indicator called a golden cross. It uses a simple moving average indicator to pick my entry point.

The most commonly used moving averages are the 50-day and 200-day periods. Think about 50 days and 200 days, and average the price of a stock over those time periods.

In general, golden crosses over large time periods tend to form more lasting breakouts. For example, when the 50-day moving average crosses above the 200-day moving average on an index like the S&P 500, that’s one of the most popular bullish market signals you can get.

Day traders commonly use smaller time periods, like the five-day and 15-day moving averages, to trade intraday golden cross breakouts. The time interval of these charts can be adjusted all the way down to the minute, but what I like to look at is the 50-day and 200-day moving averages for stocks.

SM: You have a chart for us. Let’s put it up on the screen. What stock is it?

steve mcdonald golden cross 1

RF: Here we have AmBev (NYSE: ABEV). It’s a major beer and soft drink maker. It helps produce big names like Budweiser, Corona and Pepsi, among many other brands. And when you look at the chart, in April of last year, a golden cross hit. You can see that the 50-day moving average - the green line - crossed above the 200-day moving average – that’s the yellow line.

AmBev shot up 20% in the months that followed. Then the stock pulled back; you can see the reversal where the 50-day moved below the 200-day.

Then in April 2017, we saw a new buying opportunity. AmBev’s 50-day moving average crossed over its 200-day again. That’s the power of the golden cross. It helps you determine an entry point on a stock that you’re eyeing up.

But this isn’t the only metric you should focus on. You always want a nice balance of financial metrics to fully evaluate a stock. But I love to use this momentum indicator to determine when I’m ready to pull the trigger on a new pick.

SM: Tell me, how often does this golden cross predict an upward move?

RF: That’s the thing – it’s a lagging indicator in some cases, but in many cases it’s a great indicator if you like many other things about the company. Is it growing sales? Are earnings growing? If they also have a golden cross hit, that’s a great sign from a technical and fundamental standpoint.

SM: Where can our Members find this? If one of our guys or women wants to go out and look at one of these charts, where can they do it?

RF: There are two places. The first one is a free site, it’s called Finviz.com. It’s one of my favorite free sites. It has a screener that actually allows you to pinpoint golden crosses. You can set the screen to look for stocks that just had a 50-day moving average cross above a 200-day.

Then you’ve got your brokerage account. You have to check out your brokerage account. It should have a feature like this as well. My Scottrade account has it, and I know a lot of the other major online brokers do as well.

SM: So if they need help finding this, they can call their broker, and they should be able to walk them through it?

RF: Definitely.

SM: OK, great. So it’s the 200-day moving average, the 50-day moving average and the golden cross as an indicator of an upward move. Correct?

RF: You got it.

SM: That’s really great information. I don’t think I’ve ever heard a simpler explanation. I’ve seen many more complex ones for this cross thinking. Ryan, as always, thank you so much for your input.

RF: Thanks for having me on, Steve.

Thoughts on this article? Leave a comment below.

This Stock Is in Good Spirits

As Ryan just explained, AmBev’s fundamental strength led to a golden cross in the spring. But AmBev isn’t the only beverage company with a sunny outlook.

Diageo (NYSE: DEO) is another. It’s a longtime member of Alexander Green’s Oxford Trading Portfolio and has brought gains of more than 180% to Oxford Communiqué subscribers.

Here’s Alex checking in on the pick earlier this year...

Based in London, Diageo is one of the world's leading spirits companies. It operates in more than 180 countries and offers a wide variety of famous international brands, including Smirnoff and Ketel One vodkas, Johnnie Walker and J&B scotch, Crown Royal whiskey, Guinness stout, Baileys Original Irish Cream, Captain Morgan rum, Don Julio tequila, and Tanqueray gin, to name just a few.

Diageo owns the top two largest spirits brands in the world and 20 of the world's top 100 spirits brands. In the U.S., it holds a roughly 19% market share, twice its nearest rival.

Demographics favor its business. The number of consumers reaching legal drinking age has been on a steady upswing since 1999. And while the over-21 crowd is expanding, so is business with baby boomers. Studies show the over-55 group is increasingly reaching for spirits, not beer.

But the real bonanza lies overseas, particularly in emerging markets. The population has been increasing much faster there than in the developed world. Fifty years ago, approximately two-thirds of the world's population was based in less developed countries. Today, more than 85% of it is.

You might think that with the local currency down sharply since last year's Brexit vote - the pound recently touched a 31-year low against the dollar - earnings could be negatively impacted.

But Diageo has a truly global business. (North American sales represent a third of total revenue.) The company actually benefits from pound weakness, as this makes its products cheaper in international markets.

- Samuel Taube with Alexander Green

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