Death Cross Alert: Time to Sell?

Published on 05 Feb, 2016

death cross - investment research

What is a Death Cross?

A Death Cross occurs when a security’s short-term moving average falls below its long-term moving average. All eyes are on the 50-day and 200-day Moving Averages (MA) for this.

A Death Cross is indicative of a market moving towards a bearish zone.

The signal has more significance if the formation is supported by higher volumes. Furthermore, post a Death Cross, the long-term moving average acts as the new resistance in rising markets.

Death Cross formation in NASDAQ

Death Cross formation in NASDAQ

Decoding Historical Trends?

Historical trends suggest that the market turns bearish for at least 50–70 days after a Death Cross’ formation (accompanied by higher volumes) before changing its direction. However, if the market does not witness a Golden Cross (the short-term moving average breaks above the long-term moving average) even after 70–90 days, without any reduction in the gap between the 50-day and 200-day MAs, a crash may appear inevitable. This pattern was observed in 2000 and 2008, as evident from the chart. During these instances, the 50-day MA remained lower than the 200-day MA for more than 300 days.

Why should it Concern You?

A Death Cross pattern occurred twice over the last 90 days in the NASDAQ Composite Index (its first time since late 2011) along with high trading volumes.

After the first Death Cross’ formation, the bearish period lasted for more than 50 days.

The latest incident occurred in mid-January 2016.

NASDAQ Death Cross Jan2016

NASDAQ Death Cross Jan2016

These trends indicate a bearish market for another 30-40 days.

Views on Other Stock Exchanges Across the Globe

Similar trends have been observed in several markets across the globe.

While most markets are showcasing a bearish trend, some markets such as the DAX (Germany) and the Nikkei 225 (Japan) have shrugged it off.

The following table lists markets that gave strong signals after Death Cross formations:

Index Death Cross Occurrence Gap Between 50-day MA and 200-day MA* Death Cross Accompanied by Higher Trading Volumes Comment
TASI (Saudi Arabia) Mid-August 2015 Increasing Accompanied by higher trading volumes. Bear market in the near term.
NIFTY (India) Mid-June 2015 Increasing Mixed signals. Bear market in the near term.
DAX (Germany) Early September 2015 Decreasing Accompanied by higher trading volumes. End of the bear market.
Nikkei (Japan) Early October 2015 Decreasing Accompanied by higher trading volumes. End of the bear market.
Hang Seng (Hong Kong) End of August 2015 Increasing Not accompanied by higher trading volumes. Bear market in the near term.
Sources: Bloomberg, Reuter Eikon, Aranca Research * Data as of February 02, 2016

Is it Time to Sell?

A sale can be deferred if the market starts rising over the next 50–60 days.

If a Death Cross continues beyond the next 50–60 days however it may be advisable - based on historical trends - to exit the market.

But There is Hope!

If the market starts rising and forms a Golden Cross in the next 50–60 days, it may be a short-term buying opportunity.