Death Cross Sell Signal
The death cross is a powerful technical signal that appears on the charts. No one dies at the onset of a death cross, but as the name implies, it is a warning that a bull market is coming to an end and a bear market may soon appear. It occurs when the shorter-term moving average (i.e., 50-day ma) crosses below its longer-term moving average (i.e., 200-day ma). The onset of a death cross has proven to be reliable in forecasting severe bear markets including the 2007-2009 Global Financial crisis, the 2000-2002 Tech/Telecom Dotcom debacle, and the October 1987 crash bear decline.
There are caveats to a meaningful moving average crossover. The crossing of the two moving averages does not necessarily signal a bear trend. Rather it is the “rolling over” or the turning of the moving average trends from uptrends to flat-to-downtrends and most important, the failure on subsequent rallies to convincingly surge above its key moving averages that confirms a bear market decline.
The opposite of the death cross sell is the golden cross buy. This technical signal can signal an end to a bear decline and the beginning of the next bull market. After a prolonged downtrend, the shorter-term moving average crosses above its longer-term moving average. This signals the end to a bear decline and the start of the next bull trend. However, it is important to note that to confirm a sustainable and longer-lasting bull market both of the moving average trends need to turn higher via rising uptrends.
Although the crossovers can signal a major change in direction in the marketplace, moving average indicators are considered to be lagging indicators, and as such, do not lead the marketplace. Rather a downtrend may have already started by the time the death cross sell signal has been confirmed. Nonetheless, a confirmed death cross as well as a golden cross can help to reaffirm a sustainable bear and bull trend. This is useful when one is uncertain as to what is the dominant or prevailing trend.
The Coronavirus pandemic and the ensuing lockdown has led to another death cross on 3/27/20 as the 50-day ma crossed below its 200-day ma. In the process, it has turned both moving averages trends to downtrends. This has led to a -35.41% bear market decline. The pertinent question is whether this is the start of the next structural bear market or the continuation of the May 2013 structural bull trend.
The Mar-Apr 2020 rally is nearing a critical phase as SPX challenges its key intermediate-term resistances coinciding with the 61.8% retracement (2,934.49) from the Feb-Mar 20020 decline and the 200-day ma (3,003). The outcome of this test may help to decide the sustainability of the recent Mar-Apr 2020 rally and most important, gives us clues to the status of the Feb-Mar 2020 Coronaviris pandemic bear market.
Enclosed below are the 50-day and 200-day moving average charts during 3 previous SPX bear markets. Although no two markets are identical it may be worthwhile to spend time reviewing the market conditions and in particular SPX moving average trends leading to the prior bear markets and the conditions leading to the start of the ensuing bull markets.
2020 Coronavirus Pandemic
The coronavirus bear market from 2/29/20-3/23/20 has led to a -35.41% bear decline in SPX in 23 trading days. In the process a daily death cross sell signal has occurred on 3/27/20 as the 50-day ma (2,836) crossed below its 200-day ma (3,003). Failure to convincingly clear above its 200-day ma suggests SPX may be vulnerable for further consolidation toward key initial support at 2,727-2,736 (4/21/20 low and the 50-day ma), and below this to secondary support at 2,637-2,663 (4/6/20 breakout and 38.2% retracement from Mar-Apr 2020 rally). Violation of 2,637-2,663 warns of a deeper correction toward 2,538-2,573 (4/6/29 gap up and the 50% retracement) and then to 2,447.5-2,483 (4/1/20 low and 61.8% retracement).
2007-2009 Global Financial Crisis
The 2007-2009 global financial crisis soon led to a death cross sell signal on 12/21/07. This technical development confirmed the start of a bear decline. Notice the subsequent SPX rallies all failed near the declining 200-day ma (i.e., early-2008) and then failed near the 50-day ma (i.e., second-half of 2008). After declining 57.69% to a low of 666.79 (Mar 2009) it would take a golden cross buy signal on 6/23/09 to confirm the Mar 2009 low as a major bottom and the start of a sustainable bull trend.
2000-2002 Tech/Telecom Dotcom Debacle
During the Mar 2000-Oct 2002 Tech/Telecom decline a death cross sell signal occurred on 10/26/01 as the 50-day ma crossed below its 200-day ma and in the process rolled the moving averages from a rising to a downtrend. Repeated failures of SPX to clear above its 200-day ma prolonged the SPX bear decline until achieving a final low of 786.63 (10/02). However, the Oct 2002 bottom was not confirmed until 5/13/03 when SPX generated a golden cross buy signal as the 50-day ma crossed above its 200-day ma thereby reaffirming an uptrend.
October 1987 Crash
During the Oct 1987 crash bear market a death cross sell signal on 11/4/87 led to a -35.94% decline. Although a bottom developed during Oct 1987 it was not until 6/28/88 before a golden cross buy signal confirmed the start of the next bull trend.