The Infamous Death Cross

When the 50 – day Moving Average (MA) line crosses beneath the 200 – day – MA  it’s called a Death Cross – bearish signal.  When the 50 – day – MA crosses above the 200 – day – MA  it’s called a  Golden Cross – bullish signal.

Recently the Dow Jones Industrial Average and the Nasdaq Composite have had Death Crosses.

The daily S&P 500 (SPX) chart courtesy of Trading View illustrates it is on the verge of a Death Cross.

Fund managers that trade US stocks judge their performance relative to the SPX, a Death Cross on this index could by itself contribute to a sharp drop. The 03/12/22 blog noted considerable support in the SPX 4040 to 4080 area.  If there’s a cross on 03/14/22 it could trigger at drop to  4040 – 4080  during the trading day or sometime on 03/15/22.    

If  there’s an SPX death cross,  it could create  a lot of discussion and concern within the financial news community.  How effective is the Death Cross as a bear signal?  An examination of recent Death Crosses provides some guidance.

The daily SPX chart illustrates  what happened after the two Death Crosses in 2015 and 2016.

In early August 2015 there was great concern in the financial news media about a looming SPX Death Cross.  After the cross occurred the news media was screaming  – DEATH CROSS!  What happened was that a bottom had been made before the Death Cross.

The next signal that occurred on 01/08/16 was at least marginally effective with a maximum gain on a short trade of 7.4%.  A  trader would have to be fast because the down move only lasted 7 trading days before a bottom was made.

The next daily SPX chart illustrates Death Crosses in 2018 and 2020.

What happened in  December 2018 is  about the best you can expect in shorting a Death Cross.  A  maximum gain of 14.7% in 11 trading days.   

The SPX crash in  March 2020 generated a Death Cross after a significant bottom was in place.  Anyone shorting that Death Cross soon found themselves in a world of pain. 

Because the stock market generally moves  much faster on the downside it makes the Death Cross a dubious indicator.  From four examples, two were totally ineffective, one was marginally effective and one effective. 

If soon, there’s another SPX Death Cross, the probabilities are that it could bottom quickly.  The bottom could come on 03/14/22 or 03/15/22 in  area  of SPX 4040 to 4080.