The death cross can occur in individual stocks, within various funds, and when examining indices and averages. Considered a signal within the market, a death cross occurs when the short-term, 50-day moving average, also called a price trend, crosses below the long-term, 200-day moving average. It is named a death cross due to the X shape it makes when the trend is charted and is often considered a sign of further losses for a particular stock.
The death cross is seen as a decline in short-term momentum and can result in further losses as investors move away from the particular investment vehicle involved. However, it is not a guarantee of further losses as other market forces can override the fears relating to the trend. Further, a death cross is generally seen as temporary when examined in the long term.
Understanding Moving Averages
Moving averages relate to the change measured within a data set over time. In financial terms, the moving average monitors the change in a particular asset's value from day to day, focusing on the mean between two particular consecutive data points, to chart a course. This demonstrates the asset's current momentum within the marketplace.
Death Crosses and Market Averages
A death cross can be formed when charting an index fund as well as individual stocks. During times when all four major averages, the NASDAQ, Dow Jones Industrial Average , the S&P 500 and the Russell 2000, fall into a death cross simultaneously, they are generally referred to as the “four horsemen of the apocalypse” due to the negative connotations surrounding the event.
Significance of a Death Cross
Generally, the significance of a death cross is related to recent changes in trading . The higher the trading , the more meaningful the death cross is said to be, and vice versa. While some consider this movement as a foreshadowing of changing market trends, others believe it better represents trend changes that have already occurred and may not be indicative of future potential.