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A death cross is the X-shape created when a stock’s or index’s short-term moving average descends below the long-term moving average, possibly signaling a sell-off. The death cross typically shows up on a technical chart when the 50-day simple moving average (SMA) of a stock or index peaks, drops, and then crosses below the 200-day moving average.
Because the 50-day SMA is a short-term indicator it may be a stronger indicator of near-term volatility than the 200-day SMA, which has averaged in 200 days worth of prices. That said, both the 50-day moving average and the 200-day are, by definition, lagging indicators. Meaning: They only capture what has already happened. Still, some death crosses have appeared to forecast major recessions — although they can also send false signals.
Key Points
• A death cross is a chart pattern when a security’s 50-day moving average price falls below its 200-day moving average price.
• The death-cross pattern typically forms sellers begin to outnumber buyers, where the average 50-day price price declines to the point it crosses below the 200-day average, followed, often, by a continued downtrend.
• Historically, death crosses have preceded major crashes in some instances, but it is not an entirely reliable indicator. The Dow Jones Industrial Average has experienced significantly more death crosses than actual bear markets since 1950.
• Experienced investors look at the death cross alongside other technical indicators, such as trading volume and moving average convergence divergence.
• The death cross is the opposite of a pattern known as a golden cross, often considered an indicator of a bull market, in which the 50-day moving average price exceeds its 200-day moving average.
What Is a Death Cross, Exactly?
A death cross is based on a technical analysis of a security’s price. The short-term average dropping below the long-term average to create an X-shape is the “cross”; the “death” part of the name refers to the ominous signal that such a crossing may send for individual securities or overall markets.
A death cross tends to form over the course of three separate phases:
• First phase: In the first phase, the rising value of a security reaches its peak as the momentum dies down, and sellers begin to outnumber buyers.
• Second phase: That brings on the second phase, in which the price of the security begins to decline to the point where the actual death cross occurs. That’s typically marked as being when the security’s 50-day moving average dips under the 200-day moving average.
• Third phase: That crossing alerts the broader market to a potential bearish, long-term trend, which brings about the third and final phase of the death cross. In this phase, the stock may continue to lose value over a longer period.
If the dip following the cross is short-lived, and the stock’s short-term moving average moves back up over its long-term moving average, then the death cross is usually considered to be a false signal.
The death cross pattern is frequently used to identify potential trends in many asset classes. As a technical indicator, traders may apply it to individual stocks, major indices like the S&P 500, and commodities such as oil.
What Does the Death Cross Tell Investors?
The death cross has helped predict some of some of the worst bear markets of the past 100 years: e.g., in 1929, 1938, 1974, and 2008. Nonetheless, because it’s a lagging indicator, meaning that it only reveals a stock’s past performance, it’s not 100% reliable.
Another criticism of the death cross is that the pattern sometimes won’t show up until a security’s price has fallen well below its peak. In order to alter a death cross calculation to see the downtrend a little sooner, some investors say that a death cross occurs when the security’s trading price (not its short-term moving average), falls under its 200-day moving average.
For experienced traders, investors, and analysts, a death cross pattern for a stock is most meaningful when combined with, and confirmed by, other technical indicators.
When interpreting the seriousness of a death cross, experienced investors will often look at a stock’s trading volume. Higher trading volumes during a death cross tend to suggest that more investors are selling into the death cross, and thus buying into the downward trend of the stock.
Investors will also look to technical momentum indicators to see how seriously to take a death cross. One of the most popular of these is the moving average convergence divergence (MACD), which takes the 26-day moving average of a stock and subtracts it from that stock’s 12-day moving average, to give investors a clearer idea of where a stock is trading than one that’s updated second by second.
Death Cross vs Golden Cross: Main Differences
The opposite of a death cross is known as a golden cross. The golden cross indicator is when the 50-day moving average of a particular security moves higher than its 200-day moving average.
While the golden cross is broadly considered a signal of a bull market, it has some of the same characteristics as the death cross in that it’s essentially a lagging indicator. Experienced investors use the golden cross in conjunction with other technical indicators such as trading volume and MACD.
Is a Death Cross a Reliable Indicator?
Historically, the death cross indicator has an impressive track record as a barometer of the broader stock market, especially when it comes to severe downturns, as noted above.
The Dow Jones Industrial Average (DJIA) went through a death cross shortly before the crash of 1929. More recently, the S&P 500 Index underwent a death cross in May of 2008 — four months before the 2008 crash. However, the Dow also experienced a death cross in March of 2020. And the markets quickly rebounded, and rose to new heights.
The fact is that broad-market death crosses happen frequently. Prior to 2020, the Dow has gone through five death crosses since 2010, and 46 death crosses since 1950. Yet the index has only entered a bear market 11 times since the 1950s. A death cross doesn’t necessarily bring significant losses, either.
Even more noteworthy is that the Dow continued falling after a death cross only 52% of the time since 1950. And when it did keep falling, its median decline after a month was only 0.9%.
How to Trade a Death Cross
Investors may use a signal from a death cross pattern to help inform their strategy, however It’s important to remember that it only shows past trends. As an investor, it’s equally important to use the death cross in conjunction with other indicators such as the MACD and trading volume, as well as other news and information related to the security you’re investing in.
The Takeaway
Although the ominous-sounding death cross stock pattern is valued by some analysts and investors as a way to foretell a downturn in a certain security or even the broader market, it’s not a guarantee of future performance. The main elements of the death cross — a stock’s short-term moving average and long-term moving average — are lagging indicators that may or may not predict a bearish turn of events.
The typical investor may not use or even look for death crosses as a part of their strategy. But knowing, on a basic level, what the term refers to, and why it may be important to the markets, is a good idea.
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FAQ
Is the death cross a reliable predictor of a crash?
No. A death cross relies on historical data, meaning the cross often occurs after significant sell-off has already occurred. While it has predicted some crashes, historically, it has also appeared as an indicator when no crash ensued.
How is a death cross calculated?
It is calculated by plotting the 50-day moving average of a security or an index as well as the 200-day moving average. The cross occurs when the 50-day average drops below the 200-day average.
Can a death cross pattern occur in any market?
The death cross is frequently used as a technical indicator across different asset classes. Traders may apply it to individual stocks, major indices, commodities, and other assets to identify signals of a potential trend.
What is the opposite of a death cross?
The opposite of a death cross is called a golden cross, which occurs when a short-term moving average surpasses a long-term moving average. A golden cross pattern may indicate a shift to bullish momentum and the potential for rising prices.
How do professional investors use the death cross?
The death cross is one of many technical signals – such as trading volume and moving average convergence divergence – that experienced traders consider before buying or selling. It can provide important context around the momentum of a given stock, market, or the broader economy.
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