Last June, every financial station on TV heralded the Golden Cross. This is the term that describes the 50 Day Moving Average, which is the average price of the last 50 closing prices of a security or index, crossing above the 200 Day Moving Average. That was a good moment for bulls because it is one indicator that suggests that the market has confirmed a new bull trend. Well, one year later, the opposite cross has occurred – the Death Cross. The 50 Day Moving Average of the S&P 500 has crossed below the 200 Day Moving Average. In the snapshot below, the 50 Day MA is in green and the 200 Day MA is in yellow.
The Death Cross signals that another change in trend, from a bull market to a bear market, may be taking place. And although the cross by itself is not a very powerful trading tool, it is one more piece of the technical puzzle that is lining up in favor of a bear market. The markets are tracing out a pattern of lower highs and lower lows since the peak in April. An important technical stop has been breached with a close below 1040 on the index. The close below 1040 also completed the head and shoulders pattern Rick mentioned two weeks ago (although the neckline did not hold with the last two day rally).
The next significant piece will be the slope of the 200 Day MA. Currently the line is barely rising, although for intents and purposes it has flat lined. When the slope turns negative this would confirm the cross, and signal low returns for the index. Ned Davis, which is an incredibly great independent research service, studied the slope and determined that the gain per annum when the 200 day MA is falling is a mere .2%. This is compared to a 7.5% gain when the slope is rising. The bulls need to get going to undue this damage.
