What is a death cross?

Hello Nick,

The death cross is a technical chart pattern that indicates a potential selloff. The death cross appears on a chart when a stock’s short-term moving average goes below its long-term moving average. The most common moving averages used in this pattern are the 50-day and 200-day moving averages, though some traders like experimenting with different average lengths. The death cross indicator has proven to be a reliable predictor of some of the most severe bear markets of the past century, namely: 1929, 1938, 1974, and 2008. Investors who got out of the stock market at the start of these bear markets avoided enormous losses that were as high as 90%. Because a death cross shows long term trends, as opposed to many short-term chart patterns such as the doji candle; it carries more weight for investors concerned about locking in gains before a new bear market approaches. It is considered useful when assessing trends rather than making short trades based on it. An increase in volume typically accompanies the appearance of this indicator, further confirming it.

The opposite of the death cross is none other than the golden cross. It occurs when the short-term moving average moves above the long-term moving average. Many investors believe that death cross is a bearish indicator. The golden cross chart pattern often shows up after a prolonged downtrend has run out of momentum. As is true with the death cross, investors should confirm the trend reversal after several days or weeks of price movement in the new direction since these indicators alone do not mean a lot. Much of the investing process is actually following patterns, which is a self-fulfilling behavior in a sense, as trading volumes increase with the attention of more investors who are driven in part by an increase in financial news stories abut a particular stock or other asset class.

One last thing to note is that all the indicators are “lagging,” and no indicator can truly predict the future.A death cross/golden should always be confirmed with other signals and indicators before putting on a trade.

Here is an example of a death cross: