A technical chart pattern that indicates the transition from a bull market to a bear market
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What is a Death Cross?
The death cross is a chart pattern that indicates the transition from a bull market to a bear market. This technical indicator occurs when a security’s short-term moving average (e.g., 50-day) crosses from above to below a long-term moving average (e.g., 200-day).
The chart below shows a death cross occurring in the NASDAQ 100 Index during the Dotcom crash of 2000.
The indicator gets its name from the alleged strength of the pattern as a bearish indication. In short, traders who believe in the pattern’s reliability say that a security is “dead” once this bearish moving average crossover occurs.
Connection to the Golden Cross
The death cross is the exact opposite of another chart pattern known as the golden cross.
The golden cross occurs when the 50-day moving average of a stock crosses above its 200-day moving average. The golden cross, in direct contrast to the cross of death, is a strong bullish market signal, indicating the start of a long-term uptrend.
Three Phases of Forming the Death Cross
There are three primary phases in the formation of the cross of death pattern.
The first phase involves the existing uptrend of a security, when it begins to reach its peak as buying momentum tapers off. Then the price begins to fall as sellers gain the upper hand in the market.
The second phase is the decline in the security’s price to a point where the actual death cross occurs, with the 50-day moving average falling below the 200-day moving average. This downside shift of the 50-day average signals a new, bearish long-term trend in the market.
The final phase occurs with the continuation of the downward movement in the market. The new downtrend needs to be sustained in order for a genuine death cross to be deemed to have occurred. If the period of downward momentum is merely short-lived, and the stock turns back to the upside, then the cross of death is considered a false signal.
Determining the Strength of a Death Cross Signal
The death cross pattern is more useful to market analysts and traders when its signal is confirmed by other technical indicators. One of the most popular technical indicators to confirm a long-term trend change is trading volume. The bearish cross pattern is considered a more reliable signal if it occurs along with high trading volumes. Higher trading volume indicates more investors buying into (or rather, selling into) the idea of a major trend change.
Momentum indicators such as the MACD can also be used for confirmation. They work well because the momentum of a long-term trend often dies just a bit before the market makes its turn.
A Lagging Indicator
Some market analysts and traders put a limited amount of reliance on the death cross pattern because it is often a very lagging indicator. The downside moving average crossover may not occur until significantly after the point at which the trend has shifted from bullish to bearish. A security’s price may have already fallen a substantial amount before the crossing death signal.
To overcome this potential weakness from lagging behind price action, some analysts use a slight variation of the pattern. In this variation, a death cross is deemed to have occurred when the security’s price – rather than a short-term moving average – falls below the 200-day moving average. This event often occurs well in advance of the 50-day moving average crossover.
Other Variations
The 50-day and 200-day moving averages are those most commonly used to identify a death cross. However, some market analysts favor using other moving averages. One common variation of the death signal is a 20-day moving average downside cross of the 50-day moving average. Another variation substitutes the 100-day moving average in place of the 200-day moving average as the long-term average.
The above variations may work more effectively when there is a particularly wide separation between the 50- and 200-day moving averages. (because the further away the two averages are from each other, the more the crossover may lag behind price action.) Traders also look for the pattern in shorter time frames, using the four-hour or hourly charts rather than daily charts.
A Final Word on the Cross of Death
While there are naysayers to every technical indicator, the death cross is considered a significant chart pattern by many investors. Analysis shows the death cross pattern occurred in primary market indexes, accurately forecasting many major bear market downturns. A death cross pattern in the Dow Jones Industrial Average preceded the crash of 1929. A death cross occurred in the S&P 500 Index in May of 2008 – four months before the 2008 crash.
Related Readings
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FAQs
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.
What happens when 200 ma crosses 50ma? ›
The death cross appears on a chart when a stock's short-term moving average, usually the 50-day, crosses below its long-term moving average, usually the 200-day. The rise of the 50-day moving average above the 200-day moving average is known as a golden cross, and can signal the exhaustion of downward market momentum.
How often is a death cross correct? ›
As can be seen below, the hitrate (defined as the number of occurences where the return indeed was negative after the "Death Cross" divided by the total number of "Death Crosses") is not impressive. At best it can be called for randomness but more often it is far below 50%.
Can a death cross be bullish? ›
A golden cross and a death cross are exact opposites. A golden cross indicates a long-term bull market going forward, while a death cross signals a long-term bear market.
Is Death Cross a good indicator? ›
While there are naysayers to every technical indicator, the death cross is considered a significant chart pattern by many investors. Analysis shows the death cross pattern occurred in primary market indexes, accurately forecasting many major bear market downturns.
What typically happens after a death cross? ›
The Death Cross is a bearish signal as it indicates that an asset's price may likely undergo further declines. It also indicates the possibility that an uptrend may have met its endpoint—a reversal toward an emerging downtrend or toward an indecisive (sideways) trading range.
What is a golden cross? ›
A Golden Cross is a basic technical indicator that occurs in the market when a short-term moving average (50-day) of an asset rises above a long-term moving average (200-day). When traders see a Golden Cross occur, they view this chart pattern as indicative of a strong bull market.
What is the golden crossover strategy? ›
The golden cross occurs when a short-term moving average crosses over a major long-term moving average to the upside and is interpreted by analysts and traders as signaling a definitive upward turn in a market.
What is the best moving average trading strategy? ›
The best way to trade moving average is to use the crossover strategy, where a shorter-period moving average crossing above a longer-period moving average generates a bullish signal, and vice versa for a bearish signal. This method helps indicate potential changes in the market trend.
How do you check death cross? ›
The indicators use both 200-day and 50-day MAs to signal whether a death cross or golden cross has occurred. When the 50-day MA crosses above the 200-day MA from below, this is a golden cross. Meanwhile, a death cross is when the 50-day MA is above the 200-day MA and then crosses below the 200-day MA.
The death cross is a dramatic name for a price chart pattern. It depicts short-term price declines in a stock, commodity, index, or cryptocurrency. The golden cross is the opposite of the death cross. The golden cross indicates a bullish trend; the short-term moving average surpasses the long-term moving average.
What is a MACD death cross? ›
A death cross refers to the MACD line crossing below the signal line. It is a bearish signal, indicating a high possibility of a downtrend.
What is the opposite of a death cross trading? ›
The opposite of a death cross pattern is a golden cross, in which a shorter-term MA crosses above a longer-term MA and is typically considered a bullish signal.
What is a double death cross? ›
A double death cross happens when a short-term moving average crosses below two longer-term moving averages—essentially, creating two death crosses. For example, when the 50-day first crosses below the 100-day and then crosses below the 200-day.
What is the technical pattern of the death cross? ›
The Death Cross pattern appears when a short-term moving average drop below a long-term moving average. Typically, the 50-day moving average and the 200-day moving average are used to identify a Death Cross. The appearance of a Death Cross indicates a decline in short-term momentum and a trend toward lower prices.
How do you identify a death cross? ›
How to spot a death cross You can spot a death cross by identifying when the longer-term moving average crosses above the shorter-term moving average. The death cross occurs in three phases: The death cross can present a fake signal, where the price action finds a bottom shortly after and rebounds on its upward trend.
When was the last death cross? ›
S&P 500 Death Cross History
The S&P 500 Index formed a Death Cross on March 14, 2022, for the first time since March 2020. This followed Death Crosses formed by the other major stock market indexes, including the Nasdaq Composite Index and the Dow Jones Industrial Average, possibly reflecting the war in Ukraine.
How reliable is Golden Cross? ›
How reliable is the Golden Cross as an indicator? While the Golden Cross is a widely respected indicator, it's not infallible and should be used in conjunction with other analysis tools and risk management strategies.
What is the opposite of a death cross? ›
A golden cross suggests a long-term bull market going forward. It is the opposite of a death cross, which is a bearing indicator when a long-term moving average crosses under a short-term one.
