The death cross is one of the most feared signals in technical analysis. When traders see this pattern form, it often triggers selling and can mark the beginning of a significant downtrend. In this guide, you will learn what a death cross is, how to spot it early, and how to use it to protect your portfolio or profit from declining prices.
What is a Death Cross?
A death cross occurs when a shorter-term moving average crosses below a longer-term moving average. The classic death cross uses the 50-day simple moving average (SMA) crossing below the 200-day SMA. This crossover is considered a bearish signal because it indicates that recent price momentum has turned negative relative to the longer-term trend.
Key Point: The death cross gets its ominous name because it has preceded some of the worst market declines in history. However, it is important to note that not every death cross leads to a crash. The signal is a warning, not a guarantee.
The Three Stages of a Death Cross
Like its bullish counterpart (the golden cross), the death cross develops in stages.
Stage 1: The Uptrend Weakens
Before a death cross forms, the stock is typically in an uptrend or trading sideways. The 50-day MA is above the 200-day MA. Watch for price to start making lower highs and struggling to maintain gains.
Stage 2: The Crossover Occurs
As selling pressure increases, the 50-day MA begins to fall faster than the 200-day MA. When the 50-day MA crosses below the 200-day MA, the death cross is confirmed.
Stage 3: The Downtrend Develops
After the crossover, both moving averages should ideally slope downward, with the 50-day MA staying below the 200-day MA. This confirms the new downtrend.
How to Identify a Death Cross
Spotting a death cross is straightforward with the right chart setup.
Identification Steps
- Add the 50-day simple moving average to your chart
- Add the 200-day simple moving average to your chart
- Watch for the 50-day MA to approach the 200-day MA from above
- The death cross occurs when the 50-day crosses below the 200-day
- Confirm with increasing volume on down days
Death Cross Trading Strategies
There are several ways to use the death cross in your trading. Here are proven strategies for different types of traders.
Strategy 1: Exit Long Positions
The most common use of the death cross is as an exit signal for long positions. When the death cross forms, consider selling your shares or tightening your stop losses significantly. This protects profits and limits losses if a larger decline follows.
Strategy 2: Short Selling
Aggressive traders may use the death cross as a signal to initiate short positions. Enter a short when the 50-day MA crosses below the 200-day MA, with a stop loss above the recent swing high or above the 200-day MA.
Strategy 3: Buy Put Options
Options traders can buy put options when a death cross forms. This allows you to profit from the decline with limited risk (the cost of the premium). Consider buying puts that are slightly out of the money with 60-90 days to expiration.
Example Trade Setup
Stock ABC has formed a death cross with the 50-day MA crossing below the 200-day MA at $75.
- Short Entry: $75 (at the death cross)
- Stop Loss: $80 (above the 200-day MA)
- First Target: $65 (2:1 reward-to-risk)
- Second Target: Trail stop using the 50-day MA
Historical Examples of Death Crosses
The death cross has appeared before several major market declines:
- 2008 Financial Crisis: The S&P 500 formed a death cross in late 2007 before the major crash
- 2020 Pandemic: A death cross appeared in March 2020 during the COVID selloff
- 2022 Bear Market: The S&P 500 death cross in early 2022 preceded further declines
However, there have also been false signals where the market recovered quickly after a death cross. This is why risk management is essential.
Death Cross Limitations
While the death cross is a useful signal, it has important limitations:
- Lagging indicator: Moving averages are based on past prices, so the signal comes after the decline has already begun
- False signals: Not every death cross leads to a significant decline. Some are quickly reversed
- Whipsaws: In choppy markets, you may see multiple crosses back and forth
- Missing the bottom: If you wait for a golden cross to re-enter, you may miss significant gains from the bottom
How to Filter Death Cross Signals
Improve your death cross trading by adding these filters:
Volume Confirmation
A death cross accompanied by higher than average volume is more significant than one on low volume. Increasing volume on down days suggests real selling pressure.
Price Confirmation
Wait for price to close below both moving averages before acting. A death cross where price is still above the 200-day MA is less reliable.
Sector Analysis
Check if other stocks in the same sector are also showing death crosses. A sector-wide pattern is more significant than an isolated occurrence.
Market Context
Consider the broader market environment. A death cross in a stock while the overall market is strong may be stock-specific rather than the start of a broader decline.
Death Cross vs Golden Cross
The death cross and golden cross are opposite signals that work together as a trend-following system:
- Golden Cross: 50-day MA crosses above 200-day MA (bullish, buy signal)
- Death Cross: 50-day MA crosses below 200-day MA (bearish, sell signal)
Many long-term traders use both signals to stay on the right side of the major trend.
Protecting Your Portfolio
Here are practical ways to use death cross warnings:
- Reduce position sizes when a death cross forms
- Move stop losses tighter to protect profits
- Consider hedging with put options or inverse ETFs
- Raise cash levels in your portfolio
- Focus on defensive sectors like utilities and consumer staples
Monitor Death Cross Signals
Pro Trader Dashboard helps you track moving averages and spot potential death crosses before they happen. Stay ahead of market trends and protect your portfolio.
Summary
The death cross is a bearish technical signal that occurs when the 50-day moving average crosses below the 200-day moving average. While it has preceded major market declines, it is not a perfect indicator and should be used alongside other forms of analysis. Use death crosses as a warning sign to protect your portfolio, tighten stops, or consider bearish trades.
Continue learning about technical patterns with our guides on golden cross trading and moving average crossovers.