A death cross is a bearish technical trading indicator that occurs when the 50-day moving average falls below the 200-day moving average, indicating a big sell-off.
A death cross is formed when a slower moving average crosses the faster moving average in the upward direction. The most popular moving average used by day traders is the 50-day moving average and the 200-day moving average. The slower-moving average has to cross the faster-moving average from below for a death cross to be formed on the trading charts. Other examples of death crosses can be seen in 5-day and 15-day averages, however, longer periods are more reliable and provide stronger signals of an asset/stock/cryptocurrency.
It is important to identify the key stages of a death cross to lock the perfect time of getting out of the market before the bearish trend begins. There are three main stages of a death cross:
Notice how the graph was moving in a horizontal direction when the yellow line (signifying the 50-day moving average) was above the purple line (the 200-day moving average). When the 200-day moving average crosses the 50-day moving average from below, a death cross is formed and the price falls from that point, and later, recovers slightly when a golden cross is formed.
The death cross is usually formed when the price is falling, however, it is not a definitive indicator that the bull market has ended. There have been many instances when a death cross appeared, but the price only fell slightly, recovered, and then broke the previous all-time highs! This is also why financial analysts are divided when it comes to setting moving averages to identify a death cross. Some use the classic 200-day average and 50-day average, while others consider the crossover of the 100-day moving average over the 30-day moving average as a reliable indicator of a death cross and the start of a potential bearish trend.
Like every technical indicator, using the death cross alone is not a good strategy. Financial analysts advise using a variety of technical indicators to understand the price and volume activity from different angles before making a concrete decision to buy or sell an asset/stock/cryptocurrency. These technical indicators include, but are not limited to accumulation/distribution indicator, on-balance volume (OBV), relative strength index (RSI), moving average convergence divergence (MACD), and the stochastic oscillator.
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