Robert Steinadler, 5 months ago

What is a death cross in crypto?

Some terms that are commonly used in crypto need explanation and it is obvious why. DYOR, FUD, WGMI, and many more terms and abbreviations are circulating in this space. Each one has a meaning and while some of them are trivial others are in fact important to understand when navigating the crypto space. 

What is a death cross in crypto, what does that even mean, and how do you spot such a cross out in the wild?

What is a death cross?

The death cross is a chart pattern that is not exclusively used in crypto as an indicator but also in stock trading. It indicates a transition from a bullish long-term trend to a bearish long-term trend. The cross occurs when the short-term moving average crosses the long-term moving average from above to below. Most analysts prefer the MA-50 as the short-term indicator and the MA-200 to identify the long-term trend. While both moving averages can be used with low timeframe charts, they are most effectively used in the daily or the weekly charts to analyze higher timeframes.

The term “death cross” stems from the belief that this pattern is a strong indicator. Hence when it is formed in the chart, the asset is pronounced “dead” and might enter a strong downtrend for a longer period.

The golden cross is the opposite

The death cross is the opposite of the golden cross, which is another chart pattern that indicates a bullish uptrend. It occurs when the 50-MA crosses the 200-MA from below to above. In this case, the name stems from the belief that the uptrend will be very strong and that “golden times” lie ahead for investors and traders holding the asset.

Slow death in three stages

A death cross is going typically through three stages:

  1. The uptrend: In this stage, the short-term moving average is usually far away from crossing the long-term moving average. However, the uptrend has peaked, and the buying momentum is starting to retract.
  2. The decline: In the second phase, the price falls to a point where the death cross occurs. Meaning that the 50-MA is falling below the 200-MA. This is the actual signal that is created by this chart pattern.
  3. Downtrend established: Once the death cross has occurred, the downtrend continues, and the price falls further. This continuation is often interpreted as the confirmation that the death cross came into full effect. Otherwise, the trend could turn around, and both moving averages are only touching each other rather than crossing lines. In other cases, the downtrend might be strong enough for a cross to occur, but the price bounces back quickly only to form a golden cross. Therefore, a bearish momentum after the death cross is crucial for confirmation.

How reliable is a death cross as an indicator?

As with all other indicators, a death cross is not 100 % reliable as a signal. Instead, chart patterns are used along with fundamental analysis and other technical indicators to create a confluence of data that hopefully leads to a well-informed decision when navigating the market.

A particular problem of the death cross is that it is often formed after a breakdown from the peak. Meaning that the cross only confirms what is already known and that the price might have lost a significant percentage before both moving averages are getting close to each other. With the death cross oftentimes being the lagging indicator, some analysts don’t pay much attention to it. Ideally, the death cross is formed when the price hasn’t lost too much in value so that a downtrend can be identified preferably before it is set in.

One possibility to tackle the lag is to use another indicator as an early alert to an upcoming death cross. Rather than waiting for the short-term moving average to fall below the long-term moving average, a signal is given when the asset price falls below the 200-MA. Of course, there is even less reliability in that, but on the other hand, the price has to fall below the 200-MA for the 50-MA to even reach a position where a death cross can occur.

Other strategies include using the indicator on different timeframes or modifying one or both moving averages.

Trivia about the death cross

Even with the reputation of being a lagging indicator, the death cross is, historically speaking, an important indicator. The signal preceded the crash of 1929 of the Dow Jones Industrial Average. The same signal was given in May 2008 for the S&P 500, which indicated the big crash 4 months before it even happened.

The German DAX saw ten death crosses within the last 20 years. In three of these cases, the downtrend was almost over, but in 7 cases, the price lost significant value after the pattern was confirmed.

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