Decoding the Golden Cross in Crude Oil Markets

Against a backdrop of geopolitical tensions and tight supply conditions, the price of crude oil has been on an upward trajectory since late last year, rising from just below $70 per barrel to recently breaking the long-term downward trendline established since 2022. As of the week ending April 13, WTI crude oil has surged to as high as $87.67 per barrel, marking its highest price since October 23, 2023, and evidently signaling an improvement in the technical trend (Exhibit 1).

Notably, the 50-day moving average of crude oil recently crossed the 200-day moving average line, producing a "bullish" golden cross signal on April 5. Historically, however, the golden cross has not proven to be a consistently reliable indicator. Nevertheless, investors should not dismiss this signal, as it may herald a potentially significant uptrend in the future.

Based on backtests conducted since 2002, crude oil WTI futures have generated 15 golden cross signals (excluding the current one). Only half of these signals (7) resulted in positive returns during the golden cross period (i.e., prior to the 50-day moving average line crossing the 200-day line again), with a winning percentage just shy of 50% (46.7%).

However, the overall average return has been surprisingly robust, averaging 14% over the past 20 years despite the relatively low winning percentage. What might account for this?

Upon examining the returns of each signal, it becomes apparent that most fall within the range of -10% to 10%, indicating minimal change (Exhibit 2). However, three signals stand out, yielding returns exceeding 60% and significantly bolstering overall performance. In essence, the golden cross does not invariably signal a robust bullish cycle for crude oil prices, as evidenced by the August 2023 signal, which ultimately saw a decline of over 7%. Nonetheless, if crude oil continues to rally and accumulates more than a 10% gain post-signal, this would suggest a strong bullish trend based on backtest results from the past two decades, akin to the signal in September 2020.

In conclusion, investors should closely monitor the crude oil trend following the emergence of a golden cross, such as the signal observed last Friday. If the cumulative return exceeds the 10% threshold (which corresponds to approximately $95 per barrel for the current signal), it implies a potential upside of at least 60% since the signal first appeared.

Exhibit 1 :A Golden Cross Signal for Crude Oil WTI Futures just Emerged

Exhibit 2: The Return of Crude Oil’s Golden Cross Signals since 2003