Market Extra: A bearish ‘death cross’ has appeared in the Dow’s chart
A bearish “death cross” pattern has appeared in the Dow Jones Industrial Average’s chart for the first time in over a year, which is a warning of further losses in the near term.
But recent history suggests the pattern might not be the death knell for the stock market that the name implies, as the past two death crosses appeared much closer to the bottom than the previous top.
dropped 913.21 points, or 4.6%, to close Friday at a 3 1/2-year low of 19,173.98, and has now dropped 35% since closing at a record 29,551.42 on Feb. 12 amid growing fears of the economic impact of the COVID-19 pandemic. The Dow has stretched its streak of not producing back-to-back gains to six weeks. Read Market Snapshot.
The Dow’s 50-day moving average fell to 27,097.53 from 27,290.53, according to FactSet, while the 200-day moving average is at 27,149.58, down from 27,184.16.
A death cross occurs when the 50-day moving average (DMA), which many chart watchers use as a short-term trend tracker, crosses below the 200-DMA, which is widely viewed as a dividing line between longer-term uptrends and downtrends. The idea is the cross marks the spot that a shorter-term selloff transitions to a longer-term downtrend.
Crosses aren’t necessarily good market-timing indicators, however, as they are well telegraphed, but they can help put a selloff in historical perspective.
The Dow’s last death cross appeared on Dec. 19, 2018, after the Dow had dropped 13.1% from its then-record close on Oct. 3, 2018. The Dow bottomed just three days later on Dec. 24 at 21,792.20, or 6.6% below the Dec. 19 close.
The one before that appeared on Jan. 13, 2016, after falling 9.9% from its Nov. 3, 2015 peak. The Dow fell another 3.0% before bottoming four weeks later, on Feb. 11.
Not all death crosses appeared in the later innings of the selloff. The one that appeared on Aug. 11, 2015 followed a 5.0% decline from its then-record close three months earlier; the Dow fell another 10.0% in two weeks before bottoming.
It might be important to note that the 200-DMA was still rising when the August 2015 cross appeared, but was declining, like it is now, for the December 2018 and January 2016 crosses.
Meanwhile, the S&P 500 index
has lost 32% from its Feb. 19 record, but was still a little over a week away from producing a death cross, at current moving-average trajectories. The Nasdaq Composite
has dropped 30% from its Feb. 19 record, but was more than two weeks away from a death cross.