5 "Golden Cross" Stocks Poised for a Breakout

Michael Vodicka's picture

Wednesday, October 10, 2012 - 2:00pm

by Michael Vodicka

Warren Buffett made billions with his trusted buy-and-hold model.

But in the past 12 years, with investors battling abnormal amounts of volatility and getting burned in the dot-com bubble of 2000, the 9/11 attacks, the housing crash of 2006, the financial crisis of 2008 and the U.S. credit rating downgrade in 2011, many investors have chosen to abandon the buy-and-hold strategy to stay more nimble.

Take a look at the chart below for a closer look at how volatility has rocked the market ever since the dot-com implosion of early 2000 -- it's truly remarkable:

S&P 500 Monthly Chart 1950-2012

This volatility trend has driven the growing popularity of technical indicators designed to help investors decide when to buy and sell stocks. Unlike fundamental analysis, which uses earnings, dividends and valuation, technical analysis is the study of price movement to identify patterns.

But while investors have the option to choose from a long list of technical indicators like the Hindenburg Omen, Elliot Waves and Bollinger Bands, when it comes to technical analysis, keeping it simple can be a much more effective strategy.

This is why my favorite technical indicator is the Golden Cross -- when a stock's 50-day moving average (short-term movement) accelerates ahead of its 200-day moving average (long-term movement). The Golden Cross is one of the most popular and widely followed technical indicators on the Street, signaling that short-term price momentum is accelerating. This frequently leads to a rebound in a fallen stock or another leg higher for a stock riding a bullish trend. In short, the Golden Cross a sign that the price action has turned in favor of the stock.

In fact, according to market research firm Birinyi Research, the Golden Cross has appeared 26 times in the S&P 500 in the past 50 years, and continued rising 81% of the time, with an average increase of 6.6% in the following six months.

Here are five stocks from different industries that have recently formed a Golden Cross...

1. ProShares Ultra Silver (NYSE: AGQ)

The precious metals trade has been red hot for the past month after another round of heavy stimulation from the biggest central banks in the world. That has given ProShares Ultra Silver a very nice boost -- up nearly 4% since I mentioned it in September.

But with the Golden Cross just coming into play, this short-term indicator is suggesting more upside to come.

 

2. CitiGroup Inc. (NYSE: C)

Financial stocks have been on a bumpy ride during the past few years, but with the housing market showing signs of stability, the group could be set for another run higher.

Citigroup is fresh off a Golden Cross signal as shares posted big gains during the past three months along with the market.

This technical formation is supplemented by fundamental strength. Citi's forward price-to-earnings (P/E) ratio is 9, below its 10-year average of 11, in spite of analysts looking for 14% earnings growth in 2013.

 

3. Lululemon Athletica Inc. (NYSE: LULU)

Lululemon has been one of the hottest growth stocks on the Street in the past few years and 2012 is turning out to be no different.

The last time Lululemon saw a Golden Cross was in February, when shares proceeded to rally 27% to an all-time high above $80. History could soon repeat itself. Take a look at the bullish movement in the chart:

 

4. Goldman Sachs (NYSE: GS)

As you can see from the chart, Goldman has been stuck in a tight range between $90 and $120 for most of the past 12 months after falling sharply in 2011. We saw a failed Golden Cross in the spring when prices tested the upper end of the current range.

But this time around, shares are in position for another challenge to the key level, getting support from the recent Golden Cross formation.

 

5. Chesapeake Energy Corp. (NYSE: CHK)

Chesapeake took a beating this spring after the company encountered liquidity issues due to historically low natural gas prices.

But after selling some assets and securing additional capital, shares have rallied sharply, up more than 50% from the recent low.

On the chart, the 50- and 200-day moving averages are on the cusp of crossing over and delivering the coveted Golden Cross.

 

Risks to Consider: All technical indicators work some of the time, but none work all of the time. Using the Golden Cross to find stocks on the move is best suited as a satellite strategy in your portfolio.

Action to Take -->
Investors are increasingly looking for tools and strategies to help them navigate growing market volatility. These five stocks have all just logged the very bullish Golden Cross signal and are in position for another leg higher. Even though this is a simple and straight-forward indicator, its widespread use and popularity among investors make it a valuable resource for predicting future price movement.

Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of CHK in one or more of its “real money” portfolios.