Golden Cross vs Death Cross: An Overview
Technical analysis involves the use of statistical analysis to make business decisions. Technical analysts use a large amount of data, often in the form of charts, to analyze stocks and markets. Sometimes the trend lines on these charts curve and cross in shapes that form shapes, often given fun names like “mug with handle”, “head and shoulders” and “flysheet.” Technical traders learn to recognize these common patterns and what they might portend for a stock or market’s future performance.
A gold cross and a death cross are exactly opposite. A golden cross indicates a long-term bull market in the future, while a death cross indicates a long-term bear market. Both refer to the strong confirmation of a long-term trend by the occurrence of a short-term moving average crossover over a significant long-term moving average.
- A golden cross suggests a long-term bull market in the future, while a death cross suggests a long-term bear market.
- Any of the crossovers is considered more significant when accompanied by a high volume of operations.
- Once the crossover occurs, the long-term moving average is considered an important support level (in the case of the golden cross) or resistance level (in the case of the death cross) for the market from that point. onwards.
- Either crossover can occur as a signal of a trend reversal, but it occurs more often as a strong confirmation of a trend reversal that has already taken place.
The golden cross occurs when a short-term moving average crosses a long-term moving average upward and is interpreted by analysts and traders as a sign of a definite bullish turn in a market. Basically, the short-term average tends to rise faster than the long-term average, until they cross.
There are three stages to a golden cross:
- A downtrend that finally ends when the sale is exhausted
- A second stage where the shorter moving average crosses up through the longer moving average.
- Finally, the continued uptrend, which is expected to lead to higher prices.
In contrast, a similar downward moving average crossover constitutes the death crossover and is understood to indicate a decisive recession in a market. The death crossover occurs when the short-term average tends to go down and crosses the long-term average, basically going in the opposite direction of the golden cross.
The death cross preceded the economic recessions of 1929, 1938, 1974, and 2008. There have been many occasions when a death cross appeared, such as in the summer of 2016, when it turned out to be a false indicator.
There is some variation of opinion as to what precisely constitutes this significant moving average crossover. Some analysts define it as a crossing of the 100-day moving average by the 50-day moving average; others define it as the crossing of the 200-day average by the 50-day average.
Analysts also watch the crossover occurring on the lower time frame charts as confirmation of a strong and continuing trend. Regardless of variations in the precise definition or time frame applied, the term always refers to a crossover of a short-term moving average over a significant long-term moving average.