Best of the Week
Most Popular
1.Oil Wars 2016 - US vs Russia vs Saudi Arabia vs Iran - Nadeem_Walayat
2.Crude Oil Price Crash Triggering Global Instability, Trend Forecast 2016 - Nadeem_Walayat
3.Stock Market Crash - Last Week was The 2nd and Final Warning... - Clive_Maund
4.Stock Market Crash Apocalypse or Bull Market Severe Correction? - Nadeem_Walayat
5.TShipping Said to Have Ceased… Is the Worldwide Economy Grinding to a Halt? - Jeff_Berwick
6.Crude Oil Price Crash Catastrophe, Independant Scotland Literally Begging to Rejoin the UK - Nadeem_Walayat
7.Summers: Global Economy Can't Withstand Four 2016 Fed Hikes - Bloomberg
8.Gold And Silver: New World Order: Public Be Damned, Preferably Dead - Michael_Noonan
9.Rigged U.S. Ttreasury Bond Market Double Barreled Hidden Q.E. To Infinity - Jim_Willie_CB
10.Major Stocks Bear Market Awakening - Zeal_LLC
Last 5 days
UK Interest Rates, Economy GDP Forecasts 2016 and 2017 - 6th Feb 16
Gold Price, Mining Stocks Rocket Higher - 5th Feb 16
Crude Oil Price Bottoms and Blues - 5th Feb 16
Gold and Silver: Ripe for a Recovery! China May well Change the Game - 5th Feb 16
How Pension Plans are Responding to Financial Repression - 5th Feb 16
Senior Gold Producer Goldcorp Takes Large Stake in Nevada's Gold Standard Ventures - 5th Feb 16
Tips for Smart Oil and Natural Gas Investing 2016 - 5th Feb 16
Another Corporate Giant Is Leaving the U.S. – What This Means for You - 4th Feb 16
TPP is Economic Warfare, Trade Can Make Everyone Worse Off / Governments are Stupid - 4th Feb 16
Gold and Stock Markets Inflection Points Galore - 4th Feb 16
Putin Cries Dyadya (Uncle), Is Saudi Arabia Listening? - 4th Feb 16
Gold Price Golden Bottom? Video - 4th Feb 16
Look North for Value-Priced Growth in Healthcare Biotech Stocks - 4th Feb 16 - TLSReport
BrExit EU Referendum - Britain's FINAL Chance for Freedom From Emerging European Superstate - 4th Feb 16
HUI Now Confirming Gold Price Move Higher - 4th Feb 16
Crude Oil Price Forecast 2016 As Good As It Gets - 4th Feb 16
Gold and Silver More 'Flight To Safety' Active February - 3rd Feb 16
Raytheon Company: A Defensive Stock for a Defensive Market - 3rd Feb 16
Is Silver Really a Weak Link - 3rd Feb 16
Gold to Beat Stocks 2016? - 3rd Feb 16
David Chamberlain Cameron, Britain's Last Chance for Freedom From Emerging European Super State - 3rd Feb 16
EU UK Draft or Daft Agreement By Donald Tusk to Members of the European Council in Full - 2nd Feb 16
Europe: Why It's Going to Get a Lot Worse Before It Gets Better - 2nd Feb 16
The Next Generational Bust Is Coming, Stock Market 70% Collapse - 2nd Feb 16
The Coming Stock Market Decline May be a Monster - 2nd Feb 16
S&P 500 Has Likely Entered a New Bear Phase - 2nd Feb 16
How and Why To Move Your Assets Offshore Before the Financial Collapse - 2nd Feb 16
Central Bank Created Silver Price Rally - 1st Feb 16
The Fed Is Not Hiking Rates: Risk Assets To Perform - 1st Feb 16
US Dollar and US Treasury Bonds Big Picture - 1st Feb 16
BOJ Negative Interest Rates Central Banking Crime Syndicate's War on Cash for Triggering Panic Consumption - 1st Feb 16
Elites Set to Wipe Out Stock Market Shorts Before Next Downwave... - 1st Feb 16
Stock Market A-B-C Correction Unfolding - 1st Feb 16
Nice week for Gold : It’s All about Sentiment - 31st Jan 16
Silver Price Breaks Higher on Rising Anxiety - 31st Jan 16
Stocks Bear Market Rally Underway - 30th Jan 16
Gold And Silver Current Prices Do Not Matter - 30th Jan 16
Gold Price Potential Upside 2016 - 30th Jan 16
Stock Market Bears Pulverised by BOJ Knock Out Punch, Non Technical Take Video - 30th Jan 16
Lacy Hunt: Inflation and 10-Year US Treasury Yields Headed Lower - 30th Jan 16
The Curious Case of Copper... - 30th Jan 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Financial Crisis 2016

A Closer look at the Stock Market, XAU Death Cross

Stock-Markets / Stock Markets 2010 Aug 06, 2010 - 06:37 AM GMT

By: Clif_Droke

Stock-Markets Best Financial Markets Analysis ArticleMarket technicians sometimes let their imaginations carry them away. Because of the dry, tedious nature of the business, they sometimes exaggerate the importance of a technical signal by drawing to attention to what would otherwise be a non-event.

Take for instance the simple moving average crossover. This rather pedestrian occurrence can be seen whenever the rolling price average of a stock or market index crosses above or below a moving average of longer duration. When the 50-day moving average for the S&P 500 Index crossed under the widely followed 200-day MA, market technicians the world over had a field day.


The crossover involving the 50-day/200-day MA last month was widely hailed as a “death cross” by technical analysts, who soon began publishing gloom-and-doom forecasts based on this simple event. Hundreds of blogs, newsletters and newspaper articles were dedicated to explaining to the investing public why a simple moving average crossover carried the seeds of destruction for the U.S. equities market. The “death cross” as it has been christened is supposed to be a sure-fire harbinger for a bear market and a signal to savvy investors to liquidate stock holdings.

Indeed, many traders have taken a bearish view of the stock market at the exact time the S&P 500 Index (SPX) technically confirmed an immediate-term bottom for us in early July by breaking out above its 15-day moving average. We keep hearing talk in the financial press about the “death cross,” which is supposed to spell doom for the stock market whenever it occurs. The truth of the matter is that the indicator only works sporadically.

Had we not already suffered through the May panic sell-off and if equity prices were higher than they are now, one might easily concede that the “death cross” should be construed as an exit signal for investors long the stock market. But as it stood entering the month of July when the “death cross” occurred, the market has just had a major short-term cycle bottom. The various put/call ratios and investor sentiment readings were also suggesting the market had real turnaround potential.

Along those lines, an observer made the following comments recently: “Clif, you were the original in comparing this summer’s crisis with 1998. Many thanks; that helped me see this (below) from 1998, as all lamented together the famous death cross of the 50-day / 200-day MA combo….I just went to 1998 and saw the same thing around the “buy!”



He adds, “Looks like the famous ‘death cross’ was a meaningless indicator in 1998, about the last we have worldwide summer contagion fears. What makes it even more meaningless today is that everyone talks about it.

This is a good observation. It’s true that too many people have been talking about the “death cross” for it to have any sort of validity, at least in the near term. Alan Abelson in a recent Barron’s column made reference to the possibility that the death cross may have become a contrarian indicator. He referenced a survey done by The Chart Store (www.thechartstore.com) which looked at all the “death crosses” since 1930 and found that “somewhat more than half the time, the stocks were higher a month or two later.” From now on, whenever the 50-day MA crosses under the 200-day MA following a serious corrective decline and bottoming process in the stock market, perhaps it should be considered a contrarian reversal indicator instead of a “death cross.”

The only time the “death cross” has reliable forecasting ability in terms of predicting a bear market is when the 50-day moving average cross under the 200-day MA following a period of pronounced internal weakness. This weakness is reflected in the daily NYSE 52-week new highs-new lows, which represents the incremental demand for stocks. When new lows have been expanding consistently or when the rate of change (momentum) of the new high-new low differential is declining on a short-, intermediate-, and long-term basis, there is every reason to fear that a “death cross” could turn out to be legitimately forecasting a market crash or bear market. That wasn’t the case in July when the infamous “death cross” made its most recent appearance.

Another observation is that when a stock or market index has already taken a sizable hit and is coming off a prolonged bottoming process, there is reasons to suspect that a “death cross” will prove to be misleading. An example of this occurred in the XAU Gold Silver Index in September 2006. The 50-day moving average for the XAU crossed under the 200-day MA in late September that year, yet the gold stocks had already experienced a significant corrective decline and were coming out of a lengthy bottoming process as you can see in the XAU chart. Moreover, internal momentum for the gold mining stock group was quite strong at that time as measured by the rate of change in the number of stocks making net new highs. This had a strong forecasting validity for the gold price itself and told the astute investor that the “death cross” in the XAU was likely to be a “head fake”, which indeeds it proved to be.



Moving averages are a wonderful tool to use when trading in stocks and ETFs but their use must be tempered by a comprehensive market analysis. Exclusive reliance on a simple moving average like the 200-day MA, or making too much of a moving average crossover signal are both mistakes to be avoided. There is a time and a place for moving average crossover signals but only when the crossover is backed by other technical indications. Education is of paramount of importance in learning the right time and place for using moving averages. Let it suffice for now that when media pundits start hailing a simple market indicator as a harbinger of doom, the best policy is to assume that emotions have gotten the best of reason and to ignore the hype.

Moving Averages

Classical trend line methods can be useful but they aren’t particularly suited for a fast-moving, dynamic market environment. This is especially true where turning points occur rapidly in a market that is subject to cyclical crosscurrents as 2010 has been at times. That’s where moving averages come in handy.

With a good moving average system a trader can be reasonably assured of catching most of the important moves in an actively traded stock or ETF while eliminating many of the whipsaws that attend trading choppy markets. In the book “Stock Trading with Moving Averages” we discuss some market-tested methods that have proven successful across most major stock sectors and industry groups, and is especially geared toward the gold and silver mining stocks and ETFs. Here’s what one reader had to say about the book: “...you were the one who supercharged my charting with your moving average book ‘Stock Trading with Moving Averages’ and your constant analysis of the double and triple moving average series.”

Moving averages offer another advantage over trend lines in that they can be tailored to closely fit the dominant short-term and interim market cycles. They’re also more compatible with a trading range-type market…if you use the right moving average system. These and other strategies and tactics are discussed in “Stock Trading with Moving Averages.” Click here to order:

http://www.clifdroke.com/books/book14.mgi

Order your copy today and receive as an added bonus a copy of my latest booklet which discusses the best long-term moving averages to use with stock trading.

By Clif Droke
www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Graham
08 Aug 10, 07:57
death cross

Clif, hindesite is wonderful is it not ?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History