For new traders, the name of the Death Cross itself brings a lot of negativity and a sense of impending doom. This sentiment can trigger sell panics, especially if the market has already gone through a bearish phase before the pattern is spotted.
However, is a death cross something to fear or is it a crystal ball that gives traders a glimpse of when a dip is imminent?
Let’s find out with the help of a few examples.
What is a death cross and how precise is it?
The Death Cross is formed when a faster period moving average, typically the 50-day simple moving average, drops below the longer-term moving average, typically the 200-day SMA.
The cross is bearish because it shows that the uptrend has reversed. Large institutional investors generally do not buy in a declining market until a bottom is confirmed. As a result, buying is silent and investors holding positions rush to exit due to panic, compounding the downside.
Before looking at a few examples of death crosses in crypto markets, let’s take a look at how the model affected the S&P 500 Index between 1929 and 2019. According to Dorsey, Wright & Associates, LLC, the average drop after the formation of the death cross is 12.57% and the median drop is much less at 7.75%.
However, if we consider only the period after 1950, the average decrease is less than 10.37% and the median is 5.38%.
While these numbers are not surprising, especially for crypto traders accustomed to volatility, the bearish convergence of these two moving averages should not be taken lightly.
History shows that the death cross has resulted in a few instances of massive declines in US stock indices.
After the Death Cross on June 19, 1930, the S&P 500 fell 78.84% before hitting bottom on September 15, 1932. The next terrible Death Cross came with a correction of 53.44% that s ‘was produced from December 19, 2007 to June 17. 2009.
This shows how in some cases the cross of death was able to predict a strong correction. However, two steep declines of over 50% in a 90-year history suggest that the model is not reliable enough to instill instant fear in traders.
Recent Bitcoin Death Crosses
As cryptocurrencies are still an emerging market, the data available is limited. Let’s go over some examples of death crosses and how it affected Bitcoin.
The most recent death cross was on March 26, 2020, when the BTC / USD pair closed at $ 6,758.18. However, this death cross turned out to be a great signal to buy against the tide as the pair had already hit a 2 week low at $ 3,858 on March 13.
Prior to that, the pair formed a death cross on October 26, 2019, when the price closed at $ 9,259.78. By then, the pair had already corrected 33% from the high of $ 13,868.44 made on June 26, 2019.
After the crossover, the pair hit $ 6,430 on December 18, 2019, experiencing a further decline of 30%. From a high of $ 13,868.44 to a low of $ 6,430, the total decline was about 53%.
In another scenario, the roaring Bitcoin bull market peaked at $ 19,891.99 on December 17, 2017 and the Death Cross formed on March 30, 2018, when the pair closed at $ 6,848.01. By then, the pair had already corrected over 65% from the all-time high at the time.
Subsequently, the sell continued and the bear market bottom formed at $ 3,128.89 on December 15, 2018. This meant a further decline of about 54% from the cross of death and a total decline of 84% from the historic high.
The examples above show how the death cross occurs late in the bear market cycle and investors waiting for the pattern to form are giving the market a lot of profit back. At the same time, placing bearish bets may work for short-term traders, but could prove detrimental for long-term investors.
Key points to remember
The examples show how the death cross is a delayed pattern, which forms when much of the decline has already occurred. As a general rule, long-term investors don’t need to panic if they spot the death cross on daily charts, but it is a signal to be more careful and perhaps prepare your portfolio for positioning. for a variety of unintended results.
Death crosses can also, at times, be used as a countercurrent signal, so when spotted traders should look for other indications on the chart to spot a possible bottom.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move comes with risk, you should do your own research before making a decision.