Death cross

A death cross is the moment a short-term moving average crosses below a long-term one. The standard pair is the 50-day and the 200-day simple moving average on the daily chart.

The 50-day average reacts to the last ten weeks of trading. The 200-day covers about ten months. When the first drops under the second, recent prices are lower than the long-term average – the market has been falling for a while, not for a day.

• The top – the rise slows down, price stops making new highs, and the 50-day average flattens above the 200-day.
• The cross – price has fallen long enough for the 50-day average to move below the 200-day.
• The follow-through – price stays below both averages, and the 200-day average turns down. Rallies often stop near one of the two averages.

On Charts the MA Cross indicator plots both averages and marks each cross. The guide to the moving average explains how the lines are calculated.

• Open the daily chart and add two moving averages with lengths 50 and 200.
• Look for the place where the 50 line passes from above the 200 line to below it.
• Check the slope of the 200 line. A cross with a flat or falling 200-day average gets more weight than one where it is still rising.
• Check how far price has already fallen. A cross that comes after a deep drop often arrives near a short-term low.

• As a filter – many traders do not sell on the cross. They stop opening new longs and wait until price is back above the 200-day average.
• Entry for a short – on the first rally toward the 50-day average after the cross, not on the cross itself.
• Stop – above the 200-day average or above the last swing high before the cross.
• Exit – when price closes above the 200-day average, or when the opposite signal, a golden cross, appears.

The signals are mirror images. In a death cross the 50-day average crosses below the 200-day and the reading is bearish. In a golden cross it crosses above and the reading is bullish.

Both are lagging signals. They confirm a trend that has already started and say nothing about how long it lasts. Some death crosses come before long bear markets. Others are followed by a recovery within weeks.

• Selling in panic on the day of the cross – the averages are slow, and price has usually fallen a long way before they meet.
• Reading it as a forecast – the cross is a summary of the last 50 and 200 days, not a prediction.
• Using it in a sideways market – the averages cross back and forth and each signal is cancelled by the next.
• Mixing timeframes – a cross on an hourly chart with the same lengths is a much smaller event than the daily one.