The death cross-sell signal is the opposite of the more popular golden cross buy signal. A golden cross occurs when the short-term moving average (i.e., 50-day ma) crosses above the long-term moving average (i.e., 200-day ma). A moving average crossover indicates the potential for a significant rally and the start of a long-term bull rally. On the other hand, a death cross appears on the chart when the stock’s short-term moving average crosses below its long-term moving average, signaling the potential for a significant sell-off and a long-term bear market.
The death cross pattern is a lagging indicator, tracking the last 50 trading periods for the 50-day ma and the 200 trading periods for the 200-day ma. Once a death cross appears on the chart, the index has already declined substantially, possibly double-digits. When deciding the severity of a death cross, look for a higher trading volume. Higher trading volumes at the time of a death cross signal and the days after the crossing show traders and investors are selling and anticipating a more serious downward trend. Since it is a lagging indicator, the death cross signal captures the market action that already occurred in the past (i.e., 50-days and 200-days). Since it is not forward-looking, it can send out false signals.
The death cross tends to develop through three distinct phases. In phase 1, the price reached a peak with momentum declining and sellers outnumber buyers. The short-term moving average declines, while the long-term moving average may retain its uptrend.
During phase 2, the price begins to decline, which typically results in a death cross as the short-term 50-day ma falls below the long-term 200-day ma, signaling the potential for the start of a bearish, long-term trend.
Phase 3 is the critical stage. The action is crucial to deciding if this is the start of a significant downturn or a short-lived crossover. If the dip following the crossover is brief, and the short-term moving average moves decisively back above its long-term moving average, then the death cross may be a false signal. However, if the death cross signal results in a short-term rally that fails to clear convincingly above the 50-day and 200-day moving averages, this solidifies the start of a bear decline. Longer-term investors often wait for the rolling over signal (trending down) of the short-term and long-term moving average trends to confirm a bearish long-term trend.
In the past 100-plus years, death cross signals have an impressive track record in predicting some of the deepest recessions and bear market declines. For instance, a death cross occurred shortly before the crash of 1929. The bearish crosses also developed during 1938 and again during 1974. More recently, a death cross occurred in 2001 into the dot.com bubble burst, and several months ahead of the 2008 financial crisis/stock market crash.
The death cross signal tends to be more valuable for longer-term investors as it gives investors time to protect their long-term capital gains before a bear market begins. As mentioned, it is a lagging indicator. Investors should use the death cross strategy with other technical indicators such as MACD, RSI, volume analysis, etc.
The next few days and weeks will be critically important since some of the key U.S. market indexes just recorded their death cross-sell signals. The longer the indexes stay below the 50-day and 200-day moving averages, the weaker the trend.
The S&P 500 Index (SPX) recorded a death cross on 3/14/22, Dow Jones Industrial Average (INDU) on 3/8/22, NYSE Composite Index (NYA) on 3/8/22, Nasdaq Composite Index (COMPQ) on 2/17/22, Nasdaq 100 Index (NDX) on 3/1/22, S&P 400 Mid Cap Index on 2/16/22, S&P 600 Small Cap Index (SML) on 2/2/22. Failure to surpass the 50-day and 200-day moving averages confirms a market rolling over and signals a bear decline.