What is Death Cross? Explained

A death cross is a technical chart pattern that indicates the potential of a major sell-off in the stock market can be easily spotted on the chart of any stock or index with the help of two moving averages 50-day moving average and the 200-day moving average so when the 50-day moving average crosses below the 200-day moving average, we call in this pattern, the death cross and I know the name is a little weird but the reason it is called death the cross is because the crossover gives the appearance of skull and balls right so people use their imagination and called it is a death cross anyway, the reason a death cross is necessary and why people pay much attention to it is that it indicates bearishness or weakness in the market from a medium to long term perspective, let's take an example to understand this. Now, this right here is a daily chart of sensex and the blue line right here represents the 50-day moving average and the red line shows the 200-day moving the average now you see this point right here where the 50-day moving average is crossing below the 200-day moving average well this pattern right here is called the death cross, and as you can see that after the death cross appeared the market was bearish for a very long the time now, one thing to note is that although 50 and 200 are usually used to identify the death cross but they are not set in the stone right, so the idea here is to have a short term moving average a cross below the long term moving average so it's entirely up to you so if you want to use a different set of periods that would be perfectly fine now death cross has been a pretty reliable indicator for identifying the bear markets.

Especially in the u.s stock market and when it comes to our own market this patent has reliably predicted the dot-com crash of 2000 the the financial crisis of 2008 and course the coronavirus crisis of 2020 but remember just like any other technical indicator it should not be blindly followed because it doesn't always work, it should always be paired with other data points to reach a reliable conclusion now a quick word about the importance of the death cross now the long term investors use death cross as a bearish signal and make their investment decisions based on that's right, so they can say that okay maybe it's time for me to get out of the market or maybe create some hedges for my portfolio or sometimes the contrarian investors might even see as an opportunity to buy more in the market.