Repent callow trader, for a death cross is upon us
It might have seemed like a somewhat decent day yesterday, but it wasn’t enough to prevent the emergence of one of the more ominously named technical patterns from surfacing in the chart of the S&P 500 (SPDR S&P 500 Trust) .
Yes, we are talking about the so-called death cross.
For those unfamiliar with the argot of technical traders, a death cross is when a 50-day moving average falls below the 200-day moving average, with both trending lower. As the name implies, this switcheroo is thought to be a somewhat ominous development, suggesting a serious, and perhaps durable, breakdown of price momentum.
But like a lot of things in technical analysis — a stock market subculture which eschews consideration of fundamentals like profits and losses in favor of watching price charts for clues about where asset prices will go next — the death cross’s track record of signaling a continued slump in stocks is far from flawless.
In fact, technical analysts from Bank of America looked at the 50 death crosses (before Monday’s) that have occurred in the S&P 500 since 1927, and they found no clear signal that the market will fall in the days following the cross.
It’s basically a coin flip as to whether the market will be up or down in the days after the indicator is triggered, and essentially the death cross is “not as bearish as it sounds,” BofA analysts wrote in a note Monday — though they caution that the signal is a bit worse if you restrict the death crosses just to instances when the 200-day moving average is also falling, which it is now.
For those unfamiliar with the argot of technical traders, a death cross is when a 50-day moving average falls below the 200-day moving average, with both trending lower. As the name implies, this switcheroo is thought to be a somewhat ominous development, suggesting a serious, and perhaps durable, breakdown of price momentum.
But like a lot of things in technical analysis — a stock market subculture which eschews consideration of fundamentals like profits and losses in favor of watching price charts for clues about where asset prices will go next — the death cross’s track record of signaling a continued slump in stocks is far from flawless.
In fact, technical analysts from Bank of America looked at the 50 death crosses (before Monday’s) that have occurred in the S&P 500 since 1927, and they found no clear signal that the market will fall in the days following the cross.
It’s basically a coin flip as to whether the market will be up or down in the days after the indicator is triggered, and essentially the death cross is “not as bearish as it sounds,” BofA analysts wrote in a note Monday — though they caution that the signal is a bit worse if you restrict the death crosses just to instances when the 200-day moving average is also falling, which it is now.
