June 18th, 2010
I’ve heard the term “break out” used with regard to the S&P 500 Index’s recent cross above the 200-day moving average and I’ve also heard the expression “cross above” or “cross over”. That got me thinking as the difference between the two terms. Are they truly interchangeable?
According to Investopedia, a breakout is (emphasis added):
“A price movement through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Traders will buy the underlying asset when the price breaks above a level of resistance and sell when it breaks below support.
On the other hand, Investopedia defines a crossover as:
The point on a stock chart when a security and an indicator intersect. Crossovers are used by technical analysts to aid in forecasting the future movements in the price of a stock. In most technical analysis models, a crossover is a signal to either buy or sell.
Crossovers do not necessarily require a price and an indicator; some of the better known crossovers only involve indicators. A couple of the best known have such notoriety they were given names like “Golden Cross” or “Death Cross” and involve the crossing of two moving averages.
As I understand, the major difference between the two, a difference that shouldn’t be passed over lightly, is that
- a breakout is defined by a range or zone of prices where the trend of prices reversed course in the past through a shift in the balance of power between buyers and sellers brought about by a tug of war involving significant transaction volume. We assume that the battlefield where that struggled occurred (the zone or price range strewn with the carcasses marked by those past transactions) will likely again see unresolved battles continue in the future in the hopes of buyers and sellers for a different or a repeat of the same outcome.
While the scene of some battles do sometimes change their location (i.e., sloping trendlines), I personally, discount the long-term implications and reliability of such breakouts as compared with those that take place in the same general area of previous reversals (i.e., breakthrough to new all-time highs).
- the crossover is defined by algorithms or arithmetic calculations that define, measure or indicate, either lagging or concurrently, a momentum trend. When the current price crosses that indicator, it assumes that the prevailing momentum trend did or soon will change direction. The crossing of multiple, differently-constructed indicators implies similar outcomes.
In short, if you’re looking for a fairly reliable buy or sell timing signal, one that indicates the likely launch of a new momentum trend to different price levels, I prefer a breakout, the resolution of trading battle (so long as you identify the correct location of the next battle). If you want to see if a trend is continuing, go with cross overs.