Death Cross

A death cross is a technical trading signal that indicates the possibility of a massive sell-off. It is created when a security’s short-term moving average crosses below its long-term moving average. This signal is often used by traders as a bearish indicator, as it suggests that the current downtrend is likely to continue. The death cross gets its name from the way it looks on a chart. When the short-term moving average crosses below the long-term moving average, it creates a cross, or X, pattern. This pattern is often seen as a bearish signal, as it suggests that the current downtrend is likely to continue.

Despite its ominous name, the death cross is not a market milestone worth dreading. Market history suggests it tends to precede a near-term rebound with above-average returns. The rise of the 50-day moving average above the 200-day moving average is known as a golden cross, and can signal the exhaustion of downward market momentum. The death cross only tells you that price action has deteriorated over a period a little longer than two months, if the crossing is done by the 50-day moving average. (Moving averages exclude weekends and holidays when the market is closed.) Those convinced of the pattern’s predictive power note the death cross preceded all the severe bear markets of the past century, including 1929, 1938, 1974, and 2008. That’s an example of sample selection bias, expressed by using only the select data points helpful to the argued point. Cherry picking those bear-market years ignores the many more numerous occasions when the death cross signaled nothing worse than a market correction 1.

By understanding how this signal is created and what it means, traders can make more informed decisions about when to enter and exit trades. The death cross is a fairly simple concept, but it can be a powerful tool for traders. It is important to note that the death cross is a lagging indicator, which should be taken into consideration before relying on it for your own investments. The most common settings for the averages are 50 and 200. The death cross is a bearish signal that’s issued when the short term moving average penetrates the falling long term moving average from above. The track record of the death cross as a precursor of market gains is even more appealing over shorter time frames. Since 1971, the 22 instances in which the 50-day moving average of the Nasdaq Composite index fell below its 200-day moving average were followed by average returns of about 2.6% over the next month, 7.2% in three months and 12.4% six months after the death cross, roughly double the typical Nasdaq return over those time frames, according to Nautilus Research. The 23rd such occasion occurred in February 2022. Other recent surveys of returns following a death cross have also found a positive correlation with outperformance 1.