Within the last few months, the ‘Death Cross’ had been touted all over the Internet; it finally happened on Tuesday, when the 50-day moving average crossed below the 200-day moving average.
This chart signal sounds like some medieval weapon or pact that signals a fight that ends horribly. This has been the case at times for the stock market.
Technicians or traders who use charts to make quick buy and sell decisions think this is the point when a market that’s moving lower morphs into a proverbial boulder from a snowball. In other words, hold onto your hats boys and girls. The very fact this is occurring means that there is more than a dollop of angst in the market.
I am mostly a fundamental investor, but there are valid uses for charts. It is not voodoo or superstition like crossing the path of a black cat or walking under a ladder. However, it is a great measure of the resolve or fear of investors.
Nevertheless, it’s also not guaranteed.
Back on January 3, 2008, the ‘Death Cross’ ushered in a sell-off that lasted 14 months, and when the dust settled, the Dow was down 50%. Since then, death crosses have actually been “buy” signals pointing to climatic sell-offs that cleaned out weaker hands.
Look at the July 7th ‘Death Cross’ in 2010, it was time to back up the truck, but not run for the hills.
In the end, there is something about death cross signals. It does underscore current weaknesses and vulnerabilities. That said, I actually would have liked to have seen more fear and more downside volume.
We are in the midst of the perfect test of investor resolve, especially with yesterday’s 276-point intra- day reversal for the Dow Jones Industrial Average. The chart still points to a downside bias, but it is near a key resistance point that could get the ball rolling in the other direction.
Somehow, stocks must make a stand now or traders will make the death prophecy a self-fulfilling event.