Death Cross Explained

Do you sometimes get overwhelmed by technical jargon? 🤖

Most of us do, there are many different technical indicators out there—often with names such as “cup with handle” and “head and shoulders.” Your first thoughts might be of tea time and shampoo, but these are serious patterns that can help you to either avoid big losses or strike it big. 💸

Luckily, you don’t have to learn every single technical indicator by heart—only knowing a few major ones can already increase your chances of success. 

One of those major technical indicators is the death cross—sounds scary? It doesn’t have to be. The death cross could actually help you tremendously—it can significantly minimize your losses by indicating when to jump ship. 

Having this indicator in your toolbox might prove useful since there’s a bear market about once every 3.5 years. As with all technical indicators, you need to know what it is you’re looking for and when it’s likely to occur. 

To help you use the death cross to your advantage, we’ll tell you exactly what you need to know. In this article, we’ll tell you what a death cross is, how it is formed and what it can tell you. We’ll also discuss how to trade it, other indicators to use it with, what a golden cross is and we’ll take a look at a death cross on the Bitcoin chart.

What is a Death Cross? 🤔

Sorry to disappoint any heavy metal fans—the death cross is not the name of a band. The death cross is a pattern formed by moving averages on technical charts used by traders and analysts to gauge a security’s price action.

Roughly speaking, the investing world can be divided into two groups—long-term investors and short-term traders. Where long-term investors dive into the fundamentals of a company, traders use technical chart patterns to predict price action. 

The death cross is a pattern that isn’t only used with stocks—it’s often used as an indicator in forex as well, for example. You can use it for virtually any asset you want to trade—if you know what it’s telling you.

An Ominous Sign 😟

The death cross is a popular pattern to look at among traders and analysts—it has proven to be a reliable predictor of more than a few bear markets in the past. It’s a warning sign that a big sell-off might be just around the corner (or that a big sell-off is ending).

Seen as a long-term indicator, the death cross can indicate a trend reversal. Unfortunately, always to the downside—good news if you have a short position. Luckily, this can also help you exit a long position before losses get out of hand.

The death cross gets its ominous name from the shape it forms when it appears on a chart—and because the stock can become “dead” after the cross occurs. Don’t plan the funeral yet, because the death cross isn’t always a reliable indicator.

How Does a Death Cross Take Shape? 📉

Imagine your stock experiencing a long uptrend—sounds great, right? Unfortunately all good things come to an end. After a while, the stock begins to peak, and enthusiasm on the buying side disappears. Shortly after, the price starts going down and sellers take over.

That’s how we get to the second phase—where the selling accelerates until the death cross takes shape. A death cross is formed when the short-term moving average (usually 50 days) dips below the long-term moving average (usually 200 days).

There is continuing downward pressure on the price and the long uptrend has changed into a protracted downtrend. If—however—the downward pressure is only brief and the stock moves back up soon after, the death cross is viewed as a false signal.

What Does a Death Cross Tell Me? 🔮

If only I had a crystal ball—a thought that has probably crossed your mind while trying to make an important investment decision. Unfortunately, no one knows the future— but we do have a variety of indicators we can use to help us make the right decisions.

Who Let the Bear Out? 🐻

One of the things we’d love to be able to predict accurately is a bear market and there is never a lack of warnings in the media about impending doom. Truthfully, bear markets usually come when you don’t expect them. 

The death cross can help us here—the indicator is considered to be a sign that a security is likely going to enter a bear market. In the past, a death cross predicted some of the biggest crashes in the last century. 

It has turned out to be most reliable when the sentiment around a market or stock is already pessimistic—with up to 20% losses before the death cross occurs. If the preceding correction is small, the death cross might reflect the losses that have already taken place.

The Not-So-Great Financial Crisis 🏠

The effects of the great recession remain with us till this very day—for many investors, it took many years before their portfolios got out of the red. It took about six months for the S&P 500 to plummet a whopping 48%.

Investors who noticed the death cross on the 2007 chart of the S&P 500 wouldn’t have gotten out unscathed—it appeared when the downtrend was already well underway. They could’ve—however—escaped the brunt of the 2008 stock market crash.

Take a look at the chart: The purple line is the 50-day simple moving average, and it is crossing below the orange line—the 200-day SMA. This took place right around the end of December 2007. 

Afterward, the S&P 500 plummeted from 1440 to 1200 before a short-lived uptrend—followed by more downward pressure towards 815. The rest is history.

Not a Golden Truth 🚩

Before you bet the whole farm on the next death cross you encounter, we need to talk about the exceptions. The death cross has proven more than once that it can not always be counted on to be a reliable indicator.

Where we can see this very clearly is with gold—you remember, that analog version of bitcoin? Anyway, on the chart, we can see a death cross taking shape eight times over a roughly 15 year period. 

A couple of times the death cross was indeed followed by a sharp decline—in most cases the death cross was a good buying opportunity. So, to perceive the death cross as a bearish indicator would’ve cost you dearly most of the time.

How to Trade a Death Cross? 📈

Traders and analysts usually look at the 50-day and 200-day moving averages when looking for a death cross, but there are many variations. Other popular combinations are the 10-day and 50-day, the 50-day and 100-day, and the 30-day and 100-day. 

Keep Your Eyes on the Price 🏆

When the 50-day and the 200-day are widely separated from each other on the chart, using the 20-day and 50-day or the 100-day and 200-day might be more effective. A big gap between the 50-day and 200-day means the indicator is trailing behind the price action. 

Nobody likes a lagger—it’s crucial that the death cross forms as close to the price as possible. The closer to the price, the more reliable a death cross is considered to be. Once the death cross has formed, the long-term moving average is seen as resistance.

Tick the Boxes ✅

Since the death cross might be a false signal, it’s important to always double-check a death cross with other relevant technical indicators. Using those can help you check the validity of a death cross that is likely to form or has already formed. 

Let’s say you ticked all the boxes—you have a high conviction the death cross you just spotted accurately predicts more trouble to come. If you have an open long position, it might be time to take your chips off the table to avoid—further—losses.

You could also use the—upcoming—price drop to your advantage by opening a short position and riding the wave down. One way to do this effectively is by using the “double death cross” strategy—as if “death cross” wasn’t morbid enough.

The Double Death Cross 💀

The double death cross throws one more moving average into the mix—one that’s right between the long-term and short-term averages already used. For example, the 100-day, when you’re using the 50-day and the 200-day.

First, we’re looking for the 50-day to move below the 100-day—our first sign of a death cross. Then, we’re looking for the 50-day to cross below the 200-day—our double death cross is confirmed.

Bad news if you’re an investor—good news if you’re looking to open a short position. In that case, it might be a good idea to use multiple entries instead of one. One entry at each death cross with a stop loss right above the first death cross.

Don’t forget to take profits—if you have any, it’s not a magical potion. Study your chart and find the highest point of the candle when the second death cross occurred. When the price breaks through this level, sell your position and enjoy your well-earned gains. 💸

The Pros and Cons of Trading the Death Cross

The death cross has its limitations—just like any other indicator. Nevertheless, it’s widely used by traders and considered to be a key signal by analysts. Let’s have a closer look at the advantages and disadvantages of the death cross.

What’s so Good about the Death Cross? 👍

The death cross owes its popularity to its proven track record of predicting many major crashes and corrections. The S&P chart has shown a death cross about a dozen times since the great depression—followed by a median loss of 3.14% in the following month.

Imagine selling after a death cross formed right before some of the biggest market crashes in history—this would have greatly reduced the volatility of your portfolio. Since the death cross is a long-term indicator, it could have even spared you the dread of a bear market.

Another upside of the death cross pattern is that it’s fairly easy to use—even technical novices can add it to their toolbox. You don’t need to have years of technical training—no need to empty your bank account to pay for that Youtube guru’s trading course. 

What Are the Downsides of the Death Cross? 👎

The death cross is a lagging indicator—meaning that it often shows us what has already taken place. The bearish times you’re bracing for as a trader or investor might already be behind you when a death cross takes shape. 

Another downside of the death cross is that it is often a false signal—especially when it doesn’t agree with other technical indicators. Instead of predicting bearish times, the indicator has often been an indicator to “buy the dip”.

How Strong is a Death Cross? 💪

Solely relying on a death cross can be a losing strategy—that’s why we need a little help from a few other key indicators. Check if the other indicators confirm the signal formed by a death cross—if so, we might have ourselves a winner(or rather, loser).

Can Someone Turn up the Volume? 📻

After spotting a death cross or impending death cross, we’re expecting a turn for the worst—a bearish trend change. To confirm our suspicions, we have to turn our attention to another crucial indicator—the trading volume.

Check if the trading volume is at a high level when the death cross forms—a bearish sign is a lot more reliable when trading volume is high. High volume shows us that many investors agree that a big trend change is happening—trading is mostly psychology, after all. 

Heading for the Door 🚪🏃💨

An important indicator—to see if most of those investors are indeed heading for the door—is the Relative Strength Index. The RSI can give us more information about where the market is heading—especially when there is a lot of investor pessimism.

We expect bearish times when the RSI indicates a security is overbought—a bullish trend is likely going to be replaced by a bearish one. 

Since we haven’t talked about moving averages enough yet, we don’t want to leave out the Moving Average Convergence Divergence. The MACD shows us whether a trend is gaining in momentum or losing pace—while also indicating whether the market is bearish or bullish. 

The death cross also goes well with the “fear index”—we didn’t make up the names. The CBOE Volatility Index shows us how much fear there is in the market. A score above 20 is considered high and above 30 it’s time to fasten your seatbelt.

Just like you on a Monday morning, the market can also show signs of fatigue. We’ve mentioned quite a few technical indicators—but keeping a close eye on any relevant news can also give you a lot of insight into the strength of a death cross.

Death Cross vs. Golden Cross 🚀

Let’s put the bears back in their natural habitat and get bullish for a moment—the golden cross can be seen as the polar opposite of the death cross. In contrast to the death cross, the golden cross indicates a trend change to the upside.

A golden cross forms in a similar fashion as the death cross—but the other way around. It starts with a downtrend on its last legs and sellers finally capitulating—followed by the 50-day moving average crossing over the 200-day moving average.

Similar to the death cross, you can pick any moving averages of your liking here. We’re looking for a continuing uptrend after the golden cross takes shape—otherwise, it’s considered a false signal.

Don’t be surprised when you see a golden cross form not long after a death cross or vice-versa. It’s not uncommon for them to make cycles from one to the other—with 415 days between them on average. 

What a Death Cross Means for Bitcoin 🎢

Bitcoin is no stranger to volatility—the death cross makes frequent appearances on the oldest cryptocurrency’s chart. One such occasion was on the 21st of June 2021—the coin’s 50-day dipped below the 200-day after Bitcoin had already been in a downtrend for a while.

Time for Bitcoin hodlers to temporarily suspend sharing “to the moon” memes and cancel their Lambo orders you’d think. Although the death cross caused concern among analysts and some investors in the beginning, it turned out to be a good opportunity to buy the dip.

Most of the “damage” to the Bitcoin price had already been done by the time the death cross formed—it’s a lagging indicator, remember? The downward pressure continued for a while, but Bitcoin started trending upwards again at the end of August.

This wasn’t Bitcoin’s only death cross, however—one of the most significant death crosses on Bitcoin’s chart is one that happened after the 2018 crash. Many retail investors—sorry if this is a painful reminder—got burned when Bitcoin collapsed at the end of a bull run.

It turns out that a death cross signal wouldn’t have been much help—a death cross appeared after the biggest drop had already taken place. Not long after, Bitcoin would start to rally once again—but not after scaring countless investors away from the crypto market. 

Final Words 📌

Technical analysis can look like market voodoo at times, but the terms and patterns are not that hard to grasp when you put in the time and effort to study them. Congratulate yourself on learning about the death cross—that’s one more technical indicator under your belt.

You’ve learned what a death cross is, how it is formed, what it tells you and how you can trade it. We’ve also looked at other indicators to use with the death cross, what a golden cross is and we examined a bitcoin death cross in 2021. Hopefully, that death cross sounds a lot less scary now. 😉

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