Is the XLE Energy ETF about to have another “December 2020” moment? The XLE Energy ETF just formed its first golden cross since December of 2020. If you bought the XLE when the December 2020 golden cross formed, and then sold when the “death cross formed,” you would have gained +111.20%.
- A golden cross is seen as an extremely bullish sign in the stock market
- A golden cross occurs when a 50 day moving average crosses above a 200 day moving average
- A death cross is the reverse — a 50 day moving average crossing below a 200 day moving average
- A popular strategy is to buy stocks that form a golden cross, and sell stocks that form a death cross.
- If you would have bought the last golden cross that the XLE formed in 2020, you would have gained +111.20%.
Golden crosses are seen as a bullish sign that momentum is driving a stock higher. Think about it — if a stock is performing significantly better over the past 50 days than it was over the past 200 days, that stock is showing relative strength against itself on a historic basis. Moreover, because so many people are watching out for these golden crosses, they (like many patterns and indicators in technical analysis) can become a self-fulfilling prophecy, as traders buy-in in anticipation that the stock is about to move higher. That can in turn add momentum to a ticker that was already seeing an upswing. Remember, in the stock market, buying often begets buying, and selling often begets selling.
The December 2020 XLE Golden Cross
Depicted above is the lifespan of the last XLE golden cross, formed in December of 2020, ending when it formed its “death cross” in early 2023. Notably, in the following two years that it held the golden cross, the energy sector was the top performing sector in the stock market. In 2021, a very bullish year for the stock market which saw the S&P 500 set new-high after new-high, the energy sector was the outperformer, gaining 53.3%. In 2022, a very bearish year which saw the S&P 500 enter a bear market, the energy sector was yet again the best performer, with the top 10 best performing S&P 500 stocks all being energy stocks.
How to Trade the XLE Golden Cross
Golden crosses are one of the most simple technical patterns to follow, but there’s still room for some nuance. For instance, golden crosses are often longer-term trading patterns. That means arming yourself with short-term options here probably isn’t the way to go. If you look at the chart above, you can see that while the XLE rose +111.20% over the period, it still had several pullbacks. If you were holding LEAPS, you would have likely still made out very well. But if you were holding short-term options, you would have likely been annihilated during one of those pull backs. Alternatively, you could buy simple shares, which do not decay over time.
Additionally, one thing you can do if you’re going to take on a trade like this is to get comfortable with setting alerts in your brokerage or charting account. Alerts give you a notification when a particular thing happens in a stock — and most brokerages offer them. You can set an alert when a stock’s price rises above or below a certain level, and you can also set an alert when the 50 day moving average falls back below the 200 day moving average — which would be your sell signal, known ominously as the death cross.
In short: Nothing in the stock market is 100%. The stock market, instead, is a probability game. However, by following indicators like this, you can help skew probability in your favor — things like using long-dated options or even shares, and setting alerts for your sell signal. Utilizing indicators, making a plan before you enter a trade, setting alerts that help you follow your plan, and using the right options strategy for the job are ways that we at Market Rebellion trade smarter.