What Does the “Death Cross” Foretell for Stocks?

August 31st, 2015 by

A fair deal of attention has been paid by the mainstream financial news media to the appearance of a pattern in securities trading known as the “Death Cross.” This formation rears its ugly head in chart analysis when the short-term moving average (such as a 50-day moving average, 50 DMA) for a particular security, such as a stock index, crosses below that security’s longer-term moving average (like the 100 DMA or 200 DMA). The generic chart below shows a good example of a “Death Cross,” and why this trend is used as a strong indicator of future market movements.

Source: Investopedia

Source: Investopedia

Dissecting the Daily Charts

Daily moving averages are an important metric for chartists—technical analysts—to watch when using price trends to predict future movement. While most observers understand that reading the technical charts is not an exact science (as in, they can never be taken as definitive), there are few technical formations that are more telling (and have been more frequently proven accurate) than the Death Cross.

Source: TradingDay.com

Source: TradingDay.com

A quick review of the last time Death Crosses appeared for the major U.S. stock indices bears out the predictive capacity of this indicator. The last time that a death cross emerged for the S&P 500—generally taken as the best gauge of the entire U.S. stock market—was almost exactly 4 years ago, in August of 2011. The index indeed entered a bear market and subsequently fell to its low point about a month and a half later. The chart shown reveals the same movement following a Death Cross “event” for the Nasdaq at the turn of the millennium.

According to MarketWatch, the importance of the Death Cross is that it signals the presence of a longer-term downtrend as distinct from a mere dip. For instance, in the lead-up to the financial crisis in 2008, the entire list of 30 Dow Jones companies were beset by Death Cross formations. More telling is that these Death Crosses appeared a full three months prior to the market bottoming.

Death Cross Abounds

Once again, we’ve been seeing the ominous Death Cross emerge with increasing frequency of late, cropping up in individual securities and entire stock indices.

death_crossBoth the S&P 500 and the Dow Jones Industrial Average (DJIA) entered into Death Cross territory during August of this year (the Dow and the NYSE as a whole both experienced the Death Cross phenomenon on the same day, August 11th), likely signaling the ultimate conclusion of their multi-year bull runs. In both cases, a majority of the companies listed on these indices saw their shares move into the dreaded Death Cross pattern: 53% of the S&P 500 firms and 60% of the Dow Jones Industrials (30 firms) have already entered the Death Cross realm. It’s not just the small fries who are dragging these indices down, either: Apple, Inc. is the largest firm in terms of market cap on the entire S&P 500, and it succumbed to the Death Cross on Wednesday of last week. After the cross occurred for the S&P as a whole, the index plunged below the 2,000 mark for the first time since November 2014.

So traders beware! Although the Death Cross may not necessarily indicate the onset of a bear run, the chances are good that it’s worth taking note of.

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