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What is a death cross?

Death Cross

While the name can sound as if it is describing some terrifying event, the term death cross is a reference to a technical indicator that frequently signals the start of a bearish period for a stock, crypto, index or the market as a whole.

A death cross in trading is the term used to describe the point at which a short-term (50-day) moving average drops below a longer-term (200-day) moving average. The time frames used can be shorter or longer, but the 50-day and 200-day averages are commonly used. 

A downturn can start before a death cross indicator presents itself but it is usually interpreted as a clear signal that the stock has entered bearish territory and traders may start selling their positions and wait for the bottom. This can increase the sell pressure on the stock and intensify the downturn. 

Death cross explained 

The death cross takes its name from the literal crossing of the short- and long-term moving average trendlines. 

The death cross has proven to be a reliable indicator of major downturns, more so than its opposing indicator the golden cross, which signals an upcoming bullish run. There are many examples of a death cross in the 20th century which signalled a significant downturn in the economy. All the major market crashes such as in 1929, 1938, 2008 and 2020 were preceded by the 50-day market average dropping below the 200-day average. The relative predictive strength of the indicator forms part of the rationale for it having such an ominous name. 

Like all technical indicators, a death cross needs to be interpreted in relation to all other factors. An example of a death cross in mid-2021 could be seen on the Bitcoin price chart, which entered a death cross pattern in June. While the 50-day moving average for bitcoin did dip below the 200-day moving average, many crypto enthusiasts were quick to point out the huge bull run bitcoin had been on in the preceding year. 

In the face of many other strong technical indicators and their belief in the fundamental strength of bitcoin as an alternative currency, these investors viewed the death cross as nothing more than a temporary price correction.

Since that time, the bitcoin price has rebounded and is approaching the opposing golden cross territory as of late August but the long-term implications have yet to be seen. This is all to illustrate that technical indicators like a death cross are not the be-all and end-all, but rather that there is a strong correlation between short-term dips and longer-term downtrends. 

Death cross

Death cross limitations

A death cross, like the opposing golden cross, is best used when confirmed by other technical indicators as well as fundamental analysis. Increased trading volume, prior price history, and global market conditions should all be considered when interpreting the death cross. 

The relative drop incurred to trigger the death cross should also be considered. For example, a stock which has been trading within a narrow band to its long-term moving average for a period of time, which enters into death cross trading territory should not be interpreted the same as a stock free-falling after a strong bullish run. 

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