The “death cross” just happened today, and the media is all ready to again push the wrong narrative about the future of the bitcoin market without considering historical data. We have to look at such events with a broader perspective and truly understand how these indicators work in different cycles of the market. In this article, let us break down everything you need to know about the death cross and how impactful it is going to be moving forward.
When the 50-day moving average is higher than the 200-day moving average, we get to see the X-shaped chart pattern called death cross. Historically speaking, this chart pattern has been reliable in many cases in the past century, including the 2008 market crash, but it is crucial to remember that this indicator holds true for only bear markets.
It would be ill-advised to only consider a death cross to evaluate the trend off the market. Mainstream media paints this positive or negative picture about the market, without knowing that these are simply lagging indicators, considering the current economic climate of the crypto market.
The higher time frames for these simple moving averages are extremely lagging, and hence could produce late signals, which could cost a significant amount of money. To understand this, let’s take an example:
The chart given above is from April 2019, and we can see that there are two main patterns: a death cross and a golden cross. The death cross in this chart only shows us that it marked the short-term bottom, after which the price went up 45%. In the case of the golden cross, we saw an increase of 80% from the bottom. The MA’s lagging character proved to be true, as it showed a strong bullish continuation from here, similarly to October 2015.
Even if we look at the sectors all across the board, we see average returns being higher in both short and long term run. From the investigation done by FactSet, we can understand that death crosses have given more positive returns and outperformed golden crosses in a bull market. During the entire bull cycle, the death cross only indicated more buying opportunities at a low price, so it never gave a signal to sell or short a stock.
The biggest limitation of a death cross is that it cannot predict that a long-term bear market is approaching. We have seen in previous cycles that after a death cross occurs, the price of bitcoin rallies in the next couple of weeks by more than 50%. We can say the same about the Facebook stock. In 2018, we had two such crosses, and the first one turned out to be false, as the stock gave significant returns later that year. If an asset experiences a smaller correction and then a death cross takes place, it is only likely to indicate more buying opportunities.
In conclusion, a death cross in a bull market only points out discounts for the investor, and it is not going to dictate the long-term movement of the market. So to put yourself in the best position and avoid significant losses, you should combine other indicators to determine how an asset is going to perform.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
Subscribe to get notified on latest posts.
