By Aniket Bose. Edited by Arjun Chandrasekar.
Overview
The death cross pattern is a technical chart pattern where the pattern indicates the potential for an investor for a major opportunity to sell their stocks. The pattern appears on a chart when a stock’s short-term average selling price begins to cross below its long-term average selling price. These averages in the selling price of stocks are usually used in the 50-day and 200-day selling averages. The death cross pattern has proven to be a reliable predictor of some of the most severe bear markets of the past century, including 1929, 1938, 1974, and 2008.
Investors who were able to get out of the stock market at the start of these bear markets avoided large losses that were as high as 90% in the 1930s. Since the death cross pattern is more of a long-term indicator compared to many other short-term chart patterns, it carries much more weight for investors that are concerned about locking in their profits before another bear market gets underway. An increase in volume typically results in the appearance of a death cross pattern.
Interpretations
The death cross pattern is interpreted by analysts and traders for signaling when there is a definitive bear turn in the stock market. The death cross name comes from the X-shape created when the short-term average selling price starts to descend below the long-term average selling price. Historically, the pattern has tended to precede a prolonged downturn for both long-term and short-term average selling prices. The death cross pattern is a signal for investors that short-term momentum in a particular stock or stock index is slowing. However, a death cross pattern is not always a reliable indicator that a bull market is on the verge of ending.
There have been many times when a death cross pattern has appeared in the stock market, one of which was during the summer of 2016, when it proved to be a false indicator. The investors that got out of stocks during the summer of 2016 missed the sizable stock market gains that investors had through 2017. The summer of 2016’s death cross pattern occurred during a technical correction of around 10%, which oftentimes is seen by investors as a buying opportunity (also known as buying the dip).
There is some variation of opinion regarding what exactly a death cross pattern is amongst analysts and traders. There are some analysts and traders that define it as a crossover of the 100-day average selling price by the 30-day average selling price, whereas there are some analysts and traders that define a death cross pattern as the crossover of the 200-day average by the 50-day average. The analysts also watch out for the crossover occurring on lower time frame charts as a confirmation of a strong and ongoing trend. Regardless of the variations in the precise definition or the time frame that is applied, the term always refers to a short-term average selling price, which was at a higher value, crossing below a major long-term average selling price.
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