If you’re trading in stocks, it’s always best to have a handle on the terminology used. There are multiple terms that you need to know, especially when analyzing your different charts.
But there’s one that you definitely should know.
It’s essential that you understand what a death cross is, or else your lack of understanding may hurt you in the long run.
You’ll see a death cross in the shape of an X pattern on your chart.
It signals that a bullish market is becoming more bearish. Historically, they’ve been a way to measure of recognizing downward trends in a global market, and may even be beneficial to long-term investors.
But let’s go into a little bit more detail to help you understand what a death cross is.
What Is A Death Cross?
The death cross is a chart pattern that indicates whether a pattern is becoming bearish. You can tell a death cross by the X-shaped pattern that appears on the chart.
Usually, it means that the security of the stocks are dead once the crossover occurs. If you consider the death cross in phases, then it typically occurs in threes.
Phase one of the death cross involves an uptrend of a security, so when it starts to reach its peak once the buyers’ momentum starts to wain.
Once this happens, the price will fall, and sellers start to gain more control in the market.
The second phase of the death cross is when you see the decline in the security’s price where you see the death cross occur.
Usually, this means there’s a fifty day moving average that falls below the two hundred day average.
However, these are only the common measurements, you can also check other variations. Once you see this happen, you’ll find that it signals a bearish trend in the market.
In the third and final phase, you’ll notice the downward movement continue. However, the death cross is only official if the downward momentum continues for a long period.
If it only happens for a short time and the stocks go back up, then it’s considered a false signal.
How Accurate Is A Death Cross?
The death cross itself has a reliable track record for recognizing the severe downturns of a global market. Back in 1929, the Dow Jones Industrial Average saw a death cross shortly before the crash.
Even in 2008, a death cross appeared in the S&P 500 Index only four months prior to the crash of that year.
However, it doesn’t necessarily mean it will lead to investors losing out by staying in the market.
The most recent death cross occurred in March 2020, but the markets quickly rebounded and went higher than before.
Since 2010, there had already been five death crosses by 2020.
Even from a historical standpoint, there had only been 46 death crosses that appeared since 1950, and they only entered a bear market eleven times since then.
Truthfully, the death cross isn’t that valuable for short-term traders.
However, long-term investors can benefit from the death cross indicator on a market wide chart, as they can understand when to secure their stocks before the bear market begins.
Overall, you shouldn’t consider the death cross as the most reliable of trends. The truth about the death cross is that it’s a lagging indicator, so it will only reveal the past performance of stock.
So you should always use more than one indicator to help you decide on how you should use your investments.
Is A Death Cross Bearish?
A death cross is considered bearish, as it indicates a long-term moving average in that direction.
Typically when someone considers bearishness when referring to markets, they believe that securities and markets are likely to go down in price.
However, the death cross can also be misunderstood, as many stocks will consolidate for longer periods. That means the stocks may still catch up, and may not necessarily be bearish.
Should You Buy During A Death Cross?
While a death cross may signal bleak times ahead, that doesn’t mean that it’s bad to buy stocks during this time. While it won’t be beneficial for short-term investors, long-term investors can benefit.
By looking at death crosses in the past, there have been situations where investors have received massive gains a year after the initial close in a death cross.
When it comes to buying during a death cross depends on whether you have either short-term or long-term investment plans. Long-term investors could certainly benefit, while short-term investors may want to wait for everything to tide over.
How Long Does A Death Cross Last?
A death cross can feel bleak, but they don’t last permanently. Looking at historical records of when death crosses occur, there’s usually a twelve month period of gains that follows the initial close.
These findings are based off the fifty-three times that the index entered death cross territory. Typically, thanks to the death cross, there is a higher chance of earning gains after this twelve month period.
However, there are some occasions when losses can occur. Usually, this will occur prior to a recession. There’s no telling how long a death cross will remain, but on average, they tend to last 155 trading days.
What Is The Opposite Of A Death Cross?
If a death cross shows a long-term bull market signalling a downward trend into a bearish market, then a golden cross would be the opposite.
A golden cross will signal a long-term bear market going upward into a bullish market.
Final Thoughts
To understand a death cross, it’s best to think of it as the opposite of a golden cross. It signals the end of a long-term bull market, and the beginning of a long-term bearish market.
This is shown by an X-shaped formation on the chart as the stocks reach a downward term, and continue to go down.
While you might think that a death cross will only signal bad news, there’s always a silver lining, especially for long-term investors.
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