However, some market analysts favor using other moving averages. The 50-day and 200-day moving averages are those most commonly used to identify a death cross. This event often occurs well in advance of the 50-day moving average crossover. 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. To overcome this potential weakness from lagging behind price action, some analysts use a slight variation of the pattern. A security’s price may have already fallen a substantial amount before the crossing death signal. The downside moving average crossover may not occur until significantly after the point at which the trend has shifted from bullish to bearish. Some market analysts and traders put a limited amount of reliance on the death cross pattern because it is often a very lagging indicator. They work well because the momentum of a long-term trend often dies just a bit before the market makes its turn. Momentum indicators such as the MACD can also be used for confirmation.
Higher trading volume indicates more investors buying into (or rather, selling into) the idea of a major trend change. The bearish cross pattern is considered a more reliable signal if it occurs along with high trading volumes. One of the most popular technical indicators to confirm a long-term trend change is trading volume. The death cross pattern is more useful to market analysts and traders when its signal is confirmed by other technical indicators. Determining the Strength of a Death Cross Signal 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. The new downtrend needs to be sustained in order for a genuine death cross to be deemed to have occurred. The final phase occurs with the continuation of the downward movement in the market. This downside shift of the 50-day average signals a new, bearish long-term trend 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.
Then the price begins to fall as sellers gain the upper hand in the market. The first phase involves the existing uptrend of a security, when it begins to reach its peak as buying momentum tapers off. There are three primary phases in the formation of the cross of death pattern. 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. The golden cross occurs when the 50-day moving average of a stock crosses above its 200-day moving average. The death cross is the exact opposite of another chart pattern known as the golden cross. In short, traders who believe in the pattern’s reliability say that a security is “dead” once this bearish moving average crossover occurs. The indicator gets its name from the alleged strength of the pattern as a bearish indication.
The chart below shows a death cross occurring in the NASDAQ 100 Index during the Dotcom crash of 2000. 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 death cross is a chart pattern that indicates the transition from a bull market to a bear market.
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