Do Moving Average Crossovers Really Predict Price Direction?
Moving averages are among the most popular tools in technical analysis. Simple, elegant, and widely used, they help smooth out price data and highlight trends. But do moving average crossovers—particularly the well-known 50-day and 200-day combination—actually predict future price direction?
Yes, moving average crossovers predict price direction to a certain degree (if you use many days in the moving averages).
To find out, we ran a historical backtest using the S&P 500 index, covering a long time span from 1960 through today. Our goal was to evaluate the performance of a classic moving average crossover system:
Trading Rules
- When the 50-day moving average crosses above the 200-day moving average (a so-called “golden cross”), we enter a long position.
- We then exit that position when the 50-day crosses below the 200-day (a “death cross”). Then we reverse the process to evaluate the returns of the opposite signal.
The Results
The results might surprise you. On average:
- Golden cross (bullish): When the 50-day MA crosses above the 200-day MA, the average gain until the next death cross is almost 16%.
- Death cross (bearish): When the 50-day MA crosses below the 200-day MA, the average gain until the next golden cross is just 2%.
These numbers suggest that moving average crossovers are not just random signals. While the system doesn’t attempt to time tops and bottoms precisely, it clearly identifies favorable market regimes—periods when the odds are in your favor if you’re long.
Here’s the equity curve of a Golden Cross from 1960 until today:
A Simple System, A Clear Bias
One of the most compelling features of the crossover system is its simplicity. There are no complex indicators, no curve fitting—just two moving averages and a rule for crossing.
Despite this simplicity, the system effectively captures long-term market trends and avoids many major drawdowns.
Of course, it’s important to remember that the crossover system is slow to react. You’ll often miss the early part of a trend, and whipsaws do happen—especially in sideways or choppy markets.
But overall, the historical evidence shows a clear bias toward positive returns when the short-term trend is above the long-term trend.
Conclusion
So, do moving average crossovers predict price direction? Based on our 64-year backtest, the answer appears to be: yes, to a degree. A low number of days in the moving averages does not work as well.
The golden cross signals tend to lead to significantly better returns than the death cross periods, suggesting that crossovers can indeed help identify bullish and bearish regimes.
While no indicator works perfectly, this simple moving average system offers a statistically meaningful edge. And in the world of trading and investing, even small edges—when applied consistently—can make a big difference.