Illustration by Joel Arbaje
You’ve probably seen the word “death cross” a lot in the financial media lately. While the name itself sounds ominous enough, it’s important to understand what it is exactly, why people care about it—and why you shouldn’t panic when it happens.
A death cross is a chart pattern that appears when a stock’s short-term moving average—meaning the average price over a certain time period—crosses below its long-term moving average. There is no fixed rule about what time frame to look at, but many define it as the crossover of the 50-day moving average and the 200-day moving average.
A death cross is viewed by technical analysts as a signal that a major downturn is coming, as it suggests the short-term momentum in the underlying asset is slowing down enough and graduating into a long-term downtrend.
To be sure, a death cross is usually not the earliest sign of a downtrend, but rather often confirms a pullback that’s been in place for a while. Investors concerned about bear markets often view the death cross as a timing signal to get out and lock in the gains before everything turns ugly. Hence, a death cross accompanied by high trading volume is considered especially significant, since that means people are starting to panic and sell.
This year has seen no shortage of death crosses. A group of stocks, indexes, and asset classes have seen such a move. That incudes Facebook in April; gold in June; the Russell 2000 on Nov. 13; Alphabet on Nov. 15; Netflix on Nov. 19; crude oil on Nov. 23; and the Nasdaq Composite on Nov. 26. Even the S&P 500 came close to forming a death cross—twice.
So does a death cross