Death Cross - the intersection of death is an important signal in determining the market trend, thereby helping traders determine the optimal buy and sell points on the price line. Death Cross can appear on the chart of a single stock code, or a stock index, a currency pair in the forex market, bonds ... In this article, we will find out what Death Cross is. and the use of the Death cross signal determine market trends.
What is Death Cross?
Death Cross - the death cross - is a technical indicator that signals a major selloff is imminent, or a downtrend. Death Cross occurs when the short-term moving average (MA) crosses the long-term moving average (MA) or crosses a certain support level on the price chart. Typically, the most common moving averages used in this pattern are the 50-day and 200-day moving averages. If there is a sudden increase in trading volume (indicating that investors are selling out), it will be a stronger confirmation for the downtrend.
Death Cross proved it to be a reliable forecast when accurately forecasting some of the most severe bear markets in the last century, in 1929, 1938, 1974, and 2008. The origin of the name Death Cross is due to the X-shape when the intersection of two moving averages occurs, and after this intersection, prices often fall deeper, filled with "death" for investors.
When prices rise again, the long-term moving average will act as resistance when prices rise and touch here.
Contrary to the Death Cross is the Golden Cross - the gold cross indicates a strong movement of the bulls, or uptrend.
How to use Death Cross determines the trend
Death Cross occurs when the short-term moving average (usually a 50-day SMA) crosses below the long-term moving average (usually a 200-day SMA). This signal is considered by analysts to signal a definitive change of the bear market and an impending recession.
The MA pair that Wall Street financial investors often use is the MA 50 and the MA 200 because they think that when these two MA lines cross, the market will correct deeper. However, the Death Cross signal is most accurate when it comes to trading volume. If the price decreases and the volume increases, it is a sign of a clear downtrend. During these periods, an effective method of trading is to follow the trend. For surfing traders, Death Cross can be created from shorter-term MAs, for example MA 5, MA 8 ... cutting down compared to longer-term MAs like MA 21, MA 34...
In addition, Death Cross can be used for other indicators you use such as MACD, RS...
But Death Cross is not always a reliable indicator that the bull market is about to end. There have been many times Death Cross appears but the market did not follow the trend it warned. For example, in the summer of 2016, when the death intersection appeared, many people quickly sold their stock and missed the significant stock market increase that occurred throughout 2017.
Example of Death Cross
The following is a historical example of two deaths that happened to Facebook Inc. shares. (FB) in 2018. After the Death cross first appeared in April, the stock dropped slightly but then quickly began a protracted rally. When the death intersection appeared for the second time on the price chart in September, signaling a protracted bear market for Facebook shares.
Another example, on October 25, 2019, a Death Cross happened on Bitcoin's daily chart, and it brought Bitcoin down from $ 10,000 to a low of $ 6,500, marking a nearly 35% drop.
Image source: TradingView.com
Compare Death Cross and Golden Cross (Golden Cross)
In contrast to Death Cross, Golden Cross is a gold crossroads, appearing when the MA 50 (short-term MA) crosses above the MA 200 (long-term MA). Combined with the increased trading volume will be a confirmation for a rally.
Golden Cross can also combine with some other indicators to search for entry points and identify overbought and oversold points such as MACD, RSI ...
Limitations when using Death Cross
Like other technical indicators, both of these are lagging and no one can predict the future. As in the example of the Facebook chart above, the first Death Cross generated a false signal and a short-term trader at that time would have had some trouble during his trading.
Therefore, to avoid the case that these two indicators give false signals, traders should consider additional signals before deciding to invest.
Good luck!
