What is a 'Death Cross'
A death cross is a crossover resulting from a security's long-term moving average breaking above its short-term moving average or support level. It is so named due to the shape created when charting the activity and its association with a downward market trend. As long-term indicators carry more weight, this trend indicates a bear market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new resistance level in the rising market.
BREAKING DOWN 'Death Cross'The death cross can occur in individual stocks, within various funds, and when examining indices and averages. Considered a bearish signal within the market, a death cross occurs when the short-term, 50-day moving average, also called a price trend, crosses below the long-term, 200-day moving average. It is named a death cross due to the X shape it makes when the trend is charted and is often considered a sign of further losses for a particular stock.
The death cross is seen as a decline in short-term momentum and can result in further losses as investors move away from the particular investment vehicle involved. However, it is not a guarantee of further losses as other market forces can override the fears relating to the trend. Further, a death cross is generally seen as temporary when examined in the long term.
Understanding Moving Averages
Moving averages relate to the change measured within a data set over time. In financial terms, the moving average monitors the change in a particular asset's value from day to day, focusing on the mean between two particular consecutive data points, to chart a course. This demonstrates the asset's current momentum within the marketplace.
Death Crosses and Market Averages
A death cross can be formed when charting an index fund as well as individual stocks. During times when all four major averages, the NASDAQ, Dow Jones Industrial Average, the S&P 500 and the Russell 2000, fall into a death cross simultaneously, they are generally referred to as the “four horsemen of the apocalypse” due to the negative connotations surrounding the event.
Significance of a Death Cross
Generally, the significance of a death cross is related to recent changes in trading volume. The higher the trading volume, the more meaningful the death cross is said to be, and vice versa. While some consider this movement as a foreshadowing of changing market trends, others believe it better represents trend changes that have already occurred and may not be indicative of future potential.
The Golden Cross
The opposite of the death cross is the golden cross. This marks a time when the short-term, 50-day moving average moves above the long-term, 200-day average. This tends to be associated with positive momentum and is seen as bullish in nature.