What Is a Death Cross?
A “death cross” is a trading chart term used when a shorter-term moving average for a cryptocurrency’s price falls below a longer-term moving average.
This is most often believed to mean that the price will continue to fall for an extended period of time.
The term gets its dramatic name because it has historically preceded several major market drops.
The death cross is the opposite of a golden cross, which is when a shorter-term moving average for a cryptocurrency’s price rises above a longer-term moving average.
What insights does the Death Cross provide?
The death cross provides traders and investors with a few key insights, which can help them position themselves for likely outcomes.
Bearish Signal
Overall, the death cross is seen as a bearish signal. It suggests that the cryptocurrency at hand might be heading into a long period of decline.
Such a significant change in the shorter-term moving average is a notable warning sign. It warrants attention and may provide a glimpse into what’s on the horizon in the longer-term.
Market Sentiment and Momentum
In a similar way, the death cross points us to a turning point in terms of market sentiment—that is, how investors feel about the market.
The asset is clearly losing its upward momentum. Investors are switching from being optimistic about price action to being pessimistic – they no longer expect much more upside. In turn, this can lead to further selling even in an apparent price recovery.
Shifting to a Defensive Game Plan
Given that a death cross often leads to a longer-term drop in prices, it’s also a useful indicator for switching to a defensive game plan.
This may include selling existing positions, as well as holding off on entering any new ones. In this scenario, cash is king. Holding fiat currency might be more favorable until the market settles.
Significance of the Death Cross
The death cross is a well-known indicator that’s been used by investors for decades, with relatively good success. This is especially true in longer time frames.
In the past, the Death Cross has a good track record of leading major falls in financial markets, including cryptocurrency market tops.
This significance has also been boosted by media attention, as it is likely that the dramatic name generates more traffic for news outlets.
The above has added to the psychological weight of the death cross, potentially resulting in over-confidence in the indicator.
Examples and Case Studies
Successful Death Cross
One good example of a death cross in action can be seen in the BTC/USDT daily chart following the November 2021 peak.
Although it took some time to form, a death cross finally followed in January 2022 (see image below). This ultimately led to a market downturn that continued for 12 more months, with lows below $16,000!
Death Cross Fake-Out
On the other hand, there are also examples where a death cross might not have been so profitable to follow.
The following example occurred just half a year before the one above, in June 2021. Although a clear death cross formed, the trend only continued downward for a brief period. The market then went on to form new highs.
This exemplifies the need for traders to make sure they use other tools in combination with a death cross pattern rather than using the death cross in isolation.
Death Cross vs. Golden Cross
Both the Death Cross and Golden Cross are patterns formed by the intersection of two moving averages.
(Mishra, 2024)
While the death cross is a bearish signal, the golden cross is the opposite: a bullish signal where the shorter-term moving average crosses upwards through a longer-term moving average. This indicates that prices might keep rising for an extended period of time.
The Death Cross triggers fear and selling, while the Golden Cross encourages confidence and buying.
As with the death cross, the 50-day moving average and the 200-day moving average are most commonly used.
Conclusion
The death cross is a popular trading signal that warns of a possible extended sell-off in an asset’s price.
It shows up when recent short-term gains in a market outweigh recent long-term gains, showing a change in momentum towards the downside. However, the media coverage and psychology behind the Death Cross can sometimes outweigh its importance.
It should be noted that while the death cross can be a useful tool, it’s not foolproof. Traders should always use the death cross in combination with other methods and analysis to make well-rounded trading decisions.
Mishra, S. (n.d.). Golden Cross vs Death Cross Guide. Scribd. https://www.scribd.com/document/470177020/Golden-Cross-vs-Death-Cross-pdf
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