What Is a Death Cross?
Let me explain the 'death cross' to you directly—it's a market chart pattern that shows recent price weakness. This happens when a short-term moving average, which is the average of recent closing prices for a stock, index, commodity, or cryptocurrency over a set period, drops below a longer-term moving average. The ones traders watch most are the 50-day and 200-day averages.
You might think the name sounds ominous, but don't dread it as some market milestone. From what market history tells us, it often comes before a near-term rebound with returns that are above average.
Key Takeaways
- 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.
- Despite the dramatic name, the death cross has been followed by above-average short-term returns many times since 1992.
- 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.
Understanding a Death Cross
Understand that the death cross simply indicates that price action has weakened over a period slightly longer than two months, especially if it's the 50-day average crossing below. Remember, moving averages don't count weekends or holidays when markets are closed.
Some people swear by its predictive power, pointing out it preceded major bear markets like in 1929, 1938, 1974, and 2008. But that's selective bias—picking only the data that fits the narrative. In reality, there are far more times when it just signaled a minor correction, not a catastrophe.
Research from Fundstrat, as reported in Barron's, shows the S&P 500 was up a year later about two-thirds of the time after a death cross, with an average gain of 6.3%. That's below the long-term S&P average of over 10% since 1926, but it's not disastrous.
Over shorter periods, the pattern looks even better. From 1971 to 2022, the 22 death crosses on the Nasdaq Composite led to average returns of 2.6% in one month, 7.2% in three months, and 12.4% in six months—about double the usual returns, according to Nautilus Research.
Intuitively, it makes sense that a death cross is a stronger bearish signal after a 20% or more market drop, as that could point to real fundamental issues. But overall, history shows it's more of a current indicator of weakness, not a future predictor.
Example of a Death Cross
Take the S&P 500 in December 2018 as an example. A death cross occurred, sparking headlines about a market in tatters. The index dropped another 11% over the next two weeks and a day. But then it rallied 19% from that low in two months, ending up 11% higher than at the cross within six months.
Another one hit in March 2020 amid the COVID-19 panic, and the S&P 500 gained over 50% in the following year. These aren't every possible outcome, but they're more relevant to today's markets than older examples.
Death Cross vs. Golden Cross
The opposite of the death cross is the golden cross, where the short-term moving average rises above the long-term one. Many see this as bullish, even though death crosses have led to gains multiple times since 1992. The golden cross can mean a downtrend is losing steam.
Limitations of Using the Death Cross
If simple signals like the 50-day and 200-day average crossovers really predicted the future, they'd lose their edge fast as everyone jumped on them. The death cross grabs headlines, but it's better at signaling a short-term bottom in sentiment than the start of a bear market or recession.
What Happens After a Death Cross?
Since it's a bearish signal, you might expect prices to keep falling or reverse from an uptrend to flat or down. But as history shows, it can also lead to rebounds.
What Is the Difference Between a Death Cross and a Golden Cross?
They're opposites: the death cross is bearish, pointing to potential price drops, while the golden cross is bullish, suggesting price increases.
How Do You Check a Death Cross?
Traders look at the 50-day and 200-day moving averages. It happens when the 50-day, starting above, crosses below the 200-day.
The Bottom Line
In technical analysis, the death cross alerts you that a short-term moving average has fallen below a longer-term one, indicating a bearish trend. Use it to understand price movements, but remember its historical context.
