What is a Death Cross?

Death crosses are situations within a financial market where there is a convergence of short-term averages with long-term averages. This phenomenon of the two averages effectively crossing over one another usually indicates that the value of the security involved will shortly begin to decline or “die.” When a death cross takes place, many analysts see this as an indicator that the market is heading away from a bullish turn and may begin to move toward a bear market situation.

Perhaps the classic example of securities developing a death cross involves comparing the fifty day moving price or average with the two hundred day moving price. Using charts and graphs to track the movement of the performance of the securities, it is possible to note that the two averages are beginning to move into a convergent pattern. As the fifty-day average and two hundred-day averages meet and cross over one another, the appearance on a graph will look very much like a cross.

At the same time, the end result of the movement toward convergence also will mean changes in the climate within the financial market. As first one and then other securities begin to exhibit a death cross performance, the overall mood of the market begins to move away from a bull situation and into a bear situation. This type of activity means that brokers and investors move to minimize loss on securities currently in the portfolio. At the same time, they will seek to find the best deals on securities that may be on a downward trend but are expected to level off and begin rising again within a reasonable period of time.

While the name of a death cross sounds somewhat forbidding, it should not be automatically interpreted as a death knell for the security proper. Many factors can lead to the creation of the death cross phenomenon that are temporary in nature. It is certainly possible for the security in question to recover and eventually begin to rise once again once the trend has run its course.