Death Cross Definition: How and When It Happens(James Chen)

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Death Cross Definition: How and When It Happens
By James Chen

Updated June 28, 2024
Reviewed by Samantha Silberstein
Fact checked by Kirsten Rohrs Schmitt


Table of Contents

• What Is a Death Cross?
  
• Understanding a Death Cross
  
• Example
  
• Death Cross vs. Golden Cross
  
• Limitations
  
• FAQs
  
• The Bottom Line
  

Understanding a Death Cross

The death cross only tells you that price action hasdeteriorated over a period a little longer than two months if the crossing isdone by the 50-day moving average. (Moving averages exclude weekends andholidays when the market is closed.)
Those convinced of the pattern's predictive power notethe 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 onlythe select data points helpful to the argued point. Cherry-picking thosebear-market years ignores the many more numerous occasions when the death crosssignaled nothing worse than a market correction.2


According to Fundstrat research cited in Barron's,the S&P 500 index was higher a year afterthe death cross about two-thirds of the time, averaging a gain of 6.3% overthat span. That's well off the annualized gain of over 10% for the S&P 500since 1926, but hardly a disaster in most instances.34


The track record of the death cross as a precursor ofmarket gains is even more appealing over shorter time frames. From 1971 to2022, the 22 instances in which the 50-day moving average of the Nasdaq Composite index fell below its200-day moving average were followed by average returns of about 2.6% over thenext 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 toNautilus Research.5


Intuitively, the death cross has tended to provide amore useful bearish market timing signal when occurring after market losses of20% or more, because downward momentum in weak markets can indicatedeteriorating fundamentals. But its historical track record makes clear thedeath cross is a coincident indicator of market weaknessrather than a leading one.2




Example of aDeath Cross
Here is an example of a death cross on the S&P 500in December 2018:







Image by Sabrina Jiang © Investopedia 2021




It led to headlines describing "a stock market intatters." The index proceeded to lose another 11% over the next two weeksand a day. The S&P then rallied 19% from that low in two months and was 11%above its level at the time of the death cross less than six months later.6
Another S&P 500 death cross took place in March2020 during the initial COVID-19 panic, and the S&P 500 went on to gainjust over 50% in the next year.5


These examples don't represent the full range ofpossible outcomes after a death cross, of course. But they are at the veryleast more representative of current market conditions than earlier death crossoccurrences.




Death Cross vs.Golden Cross


The opposite of the death cross is the so-called golden cross when the short-term movingaverage of a stock or index moves above its longer-term moving average. Manyinvestors view this pattern as a bullish indicator, even though the death crosshas been followed by gains in several occurrences since 1992.1


The golden cross can indicate a prolonged downtrend hasrun out of momentum.


Limitations ofUsing the Death Cross
If market signals as simple as the interaction betweenthe 50-day and the 200-day moving averages had predictive value, you wouldexpect them to lose it quickly as market participants tried to take advantage.The death cross makes for snappy headlines but it has been a better signal of ashort-term bottom in sentiment than of an onset of a bear market or recession.


What HappensAfter a Death Cross?
A death cross is a bearish signal, so after a deathcross occurs, a downward trend is likely to continue, where the asset's pricewill further decline. It can also signal a reversal; an end of an upward trend,where the price will start to decline or remain fairly flat.



What Is theDifference Between a Death Cross and a Golden Cross?
A death cross and a golden cross are the opposite ofone another. A death cross is a bearish indicator and signals a decrease in theprice of an asset. A golden cross is a bullish indicator that signals anincrease in the price of an asset.


How Do You Checka Death Cross?
Technical traders use both a 50-day and 200-day movingaverage to determine if a death cross has occurred. A death cross occurs whenthe 50-day moving average is above the 200-day moving average and then crossesbelow the 200-day moving average.


The Bottom Line
The death cross is used in technical analysis bytraders to understand a stock's price movement, whereby it notifies a traderthat the short-term moving average has fallen below a longer-term movingaverage, which signals a bearish trend.




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