Death Cross is a technical analysis term used to describe the crossover of a security’s short-term moving average (such as the 50-day moving average) below its long-term moving average (such as the 200-day moving average). This pattern can be used to identify bearish market sentiment, and has historically been seen as an indication of future price declines.
The death cross occurs when the shorter term MA crosses under or through the longer term MA on a chart. The death cross is generally considered more reliable than other trend signals because it requires two different averages over two different time frames; by contrast, if only one indicator was used it could produce false positives or false negatives.
When this type of signal appears on a chart, traders may interpret it as an early warning that prices are likely to move lower in the near future. Although there are no guarantees with any type of technical analysis, many experienced traders watch for and react accordingly to death crosses.
Traders use various strategies when reacting to Death Crosses including increasing their stop loss levels, hedging their positions with other assets such as options and futures contracts or exiting trades altogether. It’s important to remember that even though we have historical data suggesting that a Death Cross will lead to further declines in price, past performance does not guarantee future results so caution should be taken when using this indicator alone for trading decisions.
