Trading 101: What Is A Death Cross?

Bitcoin has just experienced a Death Cross. But how significant is this chart pattern?

Trading 101: What Is A Death Cross?

A death cross is a technical analysis pattern that occurs in financial markets. It is a bearish signal that arises when two important moving averages cross each other. Specifically, it happens when the short-term moving average crosses below the long-term moving average. The two most commonly used moving averages for this purpose are the 50-day moving average and the 200-day moving average, although other combinations can also be used.

Death Cross on 1-day bitcoin chart, TradingView
Bitcoin's chart has just displayed a Death Cross.

Bitcoin's chart has just displayed a death cross, as the 50-day MA crossed down over the 200-day MA. What might this mean in practice?

A Closer Look At The Death Cross

Drilling down a little, a death cross simply reflects the reality that short-term sentiment is worse than recent long-term sentiment. The shorter-duration moving average (50-day) is more sensitive to recent price changes. The longer-duration MA (e.g., 200-day) is smoother and less sensitive to short-term fluctuations.

When the short-term moving average crosses below the long-term moving average on a price chart, it is interpreted as a bearish signal. It suggests that the short-term trend is turning weaker or reversing, which may indicate a potential decline in the asset's price.

Traders and investors often use the death cross as one of many factors in their decision-making process. However, it's important to note that no single indicator is foolproof, and traders typically use multiple tools and analyses to make informed decisions. Additionally, the interpretation of a death cross may vary depending on the context and the specific market conditions at the time it occurs. This is definitely the case for crypto.

Bitcoin Death Crosses

Bitcoin has experienced numerous death crosses in its history, as well as the corresponding bullish golden cross (when the 50-day MA crosses upwards over the 200 MA). These events are keenly watched by crypto traders.

However, death crosses are by definition a lagging indicator, since MAs are backward-looking: They only describe what has happened, not what will happen.

The crypto markets move fast, and in many cases, the MA cross only reflects the past. Because it takes some time for MAs to adjust to spot price changes, by the time the cross happens, the trend may already have changed. When a cross reinforces an existing trend, this may provide a more reliable indicator.

For example, the previous death cross took place on January 13, 2022, two months after bitcoin had peaked. A golden cross occurred on February 6 this year, two and a half months after the bottom of the bear market. This week's death cross takes place two months after the local top at $31,800.

Bitstamp TradingView Chart with 50 and 200 MAs
2019-2020 saw a series of four Death and Golden Crosses in close succession.

Previous bull markets have followed a similar pattern, only properly getting started on the second golden cross following the bear market low.

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