A death cross is a pattern of moving averages that some investors may interpret as a sell signal.
It represents a short-term moving average that has crossed below a long-term moving average that may signify a weakening price. The short-term average usually reflects a 50-day period, and the long-term average typically represents a 200-day period. When the short-term moving average crosses below the long-term moving average, this serves as a bearish signal.
Identifying a Death Cross
Watch the moving averages. If the short-term average looks poised to cross under the long-term moving average, keep a close eye on market movements. As the price crossover occurs, a death cross emerges within the chart. The death cross will not be visible unless you are viewing both moving averages themselves.
What does a Death Cross Mean?
The death cross is a lagging indicator rather than a predictive indicator, which means it confirms trends already in motion. This is seen as a selling signal due to bearish momentum. This momentum connotes that recent trends may have enough downward momentum to bring down the long-term moving average with enough time. The implication is that market sentiment is deteriorating more rapidly in the short term than in the long term, which suggests a downward trend.
While the meaning of a death cross is universal, the actions to take after identifying the death cross vary based on your investment goals and strategies.
Some strategies utilize a contrarian approach, which may seek low cost buying opportunities.
Historic Context
Some proponents of death cross analysis may point to its emergence before bearish markets in the past, such as in 1929, 1938, 1974, and 2008. The S&P 500 formed a death cross in 1929 before the Wall Street Crash and the Great Depression.
In the late 1920s, rampant speculative investing resulted in inflated prices. Margin debt grew, and when stock prices began declining, margin calls forced many investors to sell, which exacerbated the economic downturn.
Similar death cross chart patterns emerged before later economic downturns, as well. For some investors, identifying these provides a way out of an asset before the support levels fall. For other investors, these provide a low-cost entry point to the market that yields a significant return in time.
How is a Death Cross Different from a Golden Cross?
The death cross is the opposite of a golden cross. A golden cross is a bullish market indicator represented by a short-term moving average that crosses a long-term moving average from below. Many investors consider a golden cross as a buying sign and a death cross as a selling sign.
How Accurate is the Death Cross?
As a predictive indicator, the death cross is not an end-all, be-all omen of a forthcoming market crash. It is possible for prices to find support levels shortly after the crossover and rebound, but predicting this response is difficult.
While a death cross sends a strong selling signal to investors, it may signify a time to buy for other investors. It is imperative to remember that a death cross is not a death sentence, though it may indicate further declines in the price of an asset like gold. Regardless of your financial strategy, it is best to pay attention to market signals and consider other factors that affect the market.
