A death cross is a chart pattern used in technical analysis. As its name suggests, if you a death cross on a chart pattern, there is a big chance of a significant sell-off. It shows up in situations where a short-term moving average makes a crossover under the long-term moving average. Since we are talking about moving averages, the most common ones that traders use are 50- and 200- day moving averages.
Bear markets and death crosses
A death cross is a long-term indicator. Hence, there is more significant pressure on this indicator since traders would want to know more information on securing their gains before the start of a bear market. Furthermore, when a death cross appears in a chart, an increased volume is almost always present. The world has witnessed some of the worst bear markets in 1929, 1938, 1974, and 2008. If only the investors got out of the stock market like 90% of the investors did in the ’30s, they would have avoided significant losses.
Tell me more about death crosses.
Analysts say that a definite signal for a bear market is when a short-term moving average such as a 50-day SMA makes a crossover below a significant long-term moving average such as a 200-day SMA. Whenever this happens, a shape that looks like “X” appears. This is most probably the reason why the death cross is named as such.
History shows us that this pattern appears before an extended downturn for long- and short-term moving averages. It’s a signal that tells us that a stock’s or a stock index’s short-term momentum is getting slower.
However, this does not always mean that the bull market is ending already. For instance, a death cross appeared in 2016, but the bull market did not end. We can only imagine what happens to the investors who got out of the stock market because they solely depended on the death cross. They ended up missing a massive chance for profits. That incident in 2016 is a classic example of “buying the dip” or a buying opportunity when there is a technical correction of more or less 10%.
The downsides of the death cross
We know that these indicators are just indicators, and they do not guarantee anything. They are only guides for traders to watch out for the unknown. No matter how extreme is the regard of other people towards an indicator, a trader should not solely rely on it. Hence, a trader should always double-check and utilize different tools to confirm the presented ideas.
What is really a death cross?
People, especially analysts, have different opinions and ideas on death crosses and the moving average crossovers. Some analysts say that a meaningful, moving average crossover is a 100-day by the 30-day. For some, it is a 200-day crossover by the 50-day. For some, crossovers on lower time frames can be confirmation of solid trends. At the end of the day, the standard definition of death cross is always the short-term moving average with more value crosses below the major long-term moving average.