After a major bull run, we can see a death cross forming.
What is a death cross?
The death cross is a chart pattern that indicates the transition from a bull market to a bear market. 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 indicator gets its name from the alleged strength of the pattern as a bearish indication. In short, traders who believe in the pattern’s reliability say that a security is “dead” once this bearish moving average crossover occurs.
Three Phases of Forming the Death Cross:
There are three primary phases in the formation of the cross of death pattern.
The first phase involves the existing uptrend of a security, when it begins to reach its peak as buying momentum tapers off. Then the price begins to fall as sellers gain the upper hand 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. This downside shift of the 50-day average signals a new, bearish long-term trend in the market.
The final phase occurs with the continuation of the downward movement in the market. The new downtrend needs to be sustained in order for a genuine death cross to be deemed to have occurred. 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.
What is a death cross?
The death cross is a chart pattern that indicates the transition from a bull market to a bear market. 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 indicator gets its name from the alleged strength of the pattern as a bearish indication. In short, traders who believe in the pattern’s reliability say that a security is “dead” once this bearish moving average crossover occurs.
Three Phases of Forming the Death Cross:
There are three primary phases in the formation of the cross of death pattern.
The first phase involves the existing uptrend of a security, when it begins to reach its peak as buying momentum tapers off. Then the price begins to fall as sellers gain the upper hand 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. This downside shift of the 50-day average signals a new, bearish long-term trend in the market.
The final phase occurs with the continuation of the downward movement in the market. The new downtrend needs to be sustained in order for a genuine death cross to be deemed to have occurred. 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.