Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
The State Of The Economy - 28th July 16
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

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

Catching a Falling Financial Knife