Cryptocurrencies are considered a trillion-dollar ecosystem that enables investors to conduct their financial transactions anonymously and securely. However, their volatility can prevent investors from adequately analyzing the value of these assets. Traders use various indicators to identify potential and bullish or bearish trends. One of these is the death cross pattern, a type of indicator traders use to identify potential sell-offs.
What Is a Death Cross?
The death cross is a market chart pattern showing the price weakness. It occurs when the short-term moving average, which is the average of the past prices of various assets, such as stocks, commodities, and currencies, drops below the long-term moving average.
Its name stems from the shape it forms on the chart and considering that the crypto may become “dead” after the cross. However, it’s not always a reliable indicator. On the other hand, market history suggests it tends to follow a stronger recovery than average returns.
How Does a Death Cross Work?
When your crypto is in a long-term uptrend, it sounds like it will continue doing so for a while. Unfortunately, all good things eventually come to an end. After a while, the enthusiasm of the buyers disappears, and the price begins to fall.
The second phase of the selling is when the short-term moving average crosses below the long-term moving average, leading to the formation of a death cross.
The crypto gets into a prolonged downtrend, and the long-term trend has changed into a protracted one. If the downward pressure lasts for only a brief period, the death cross is considered a false signal.
Meanwhile, those who believe that the death cross foreshadows the next bear market are correct. It occurred during the Great Depression of 1929 and bear markets of the past century in 1938, 1974, and 2008.
According to a report in Barron’s, Fundstrat noted that the S&P 500 index rose about two-thirds after a year of the death cross occurrence. This move was made following the death cross in 1926, averaging a gain of around 6.3%. That’s less than the index’s annual gain of 10.5%, but it’s not a disaster.
The death cross is a good predictor of market gains as it occurs when the average of Nasdaq’s 50-day moving average falls below its 200-day moving average, which has happened 22 times since 1971. According to research firm Nautilus Research data, the average returns following these instances were around 2.6%, 7.2%, and 12.4%, respectively, within three, six, and nine months. In February 2022, the 23rd death cross occurred.
Several recent surveys have shown that the death cross can positively correlate with returns. It can also signal that the market is in a poor position. The death cross tends to provide a more accurate depiction of the underlying fundamentals of the market when the market is down 20% or more. The death cross is a historical indicator that investors can use to identify market weakness. It should not be regarded as a leading indicator.
A Good Sign or Bad Sign?
The death cross pattern is a powerful indicator of a bear market. Investors can use it to predict the direction of the financial markets. It shows a drastic price change compared to digital currencies’ performance.
The death cross pattern is a technical indicator that folks can use to identify a potential market crash. The crypto-verse also uses this concept to signal potential market crashes.
How to Trade a Death Cross
Analysts and traders usually look at the 200-day and 50-day moving averages when looking for a death cross. There are many variations when it comes to looking for a death cross. For instance, they can use the 10-day, 50-day, 100-day, and 30-day averages.
Look Out for the Price
When the 200-day and the 50-day are not close, it’s considered a good idea to use either the 100-day or the 20-day to identify a potential trend reversal. A big gap between the two averages suggests that the indicator is behind the price action.
It’s important that a death cross forms as close as possible to the price. Having a death cross that’s close to the price is considered to be reliable. Once it has formed, the long-term moving average becomes resistant.
Double-Check
Since the death cross can be a false signal, it’s important to double-check it with other technical indicators. These can help identify if it’s likely to be a real death cross.
The Double Death Cross
The double death cross adds another moving average to the mix, right between the short and long-term averages. For instance, the 100-day moving average is right between the 200-day and the 50-day moving averages.
The 50-day moving average is looking for a move below the 100-day. Meanwhile, the 200-day is looking for a confirmation of the double death cross. If you’re an investor, the bad news is that you might want to sell crypto. The good news is that you can still open a short position by using multiple entries. One entry at each death cross will give you a stop loss above the first entry.
Death Cross vs. Golden Cross
The death cross is a technical indicator showing the difference between the short-term and long-term moving averages. The golden cross is a type of indicator that shows the difference between the short-term and the long-term moving averages.
Although the death cross has been associated with significant losses in recent years, many investors still see this as a bullish indicator. The golden cross can signal that a prolonged downtrend has run its course.
Limitations of Using the Death Cross
If the market signals that the 50-day and 200-day moving averages have predictive value, you expect participants to lose money quickly. The death cross is often used to make headlines, but it has been used to signal a short-term bottom rather than a bear market or recession.
Final Thoughts
Due to death cross patterns in cryptocurrencies, investors are becoming more skeptical about the industry’s future. The pattern showcases the possibility of a sudden and steep decline in asset prices. It also warns of a significant decline in the short-term prices of cryptocurrencies.
The death cross is considered a long-term indicator that can signal a trend reversal. Unfortunately, it can also be very bad news if you hold a long position. On the flipside, it can help you exit a position before the market gets out of hand.
Source: https://crypto.news/what-you-should-know-about-the-death-cross-in-crypto-trading/