The Death Cross - Does It Work?
The Death Cross in trading is mentioned frequently in the media. Is the Death Cross just a hype, more like noise, or does it have any predictive value?
A Death Cross involves two moving averages – one short and one long, normally the 50 and 200-day moving averages. When the short moving average crosses below the long one, a Death Cross is formed. As a trading signal, it works reasonably well. We backtested the Death Cross on the S&P 500, and it signals short-term weakness but in the long run, it returns back to the mean returns. If you sell when a Death Cross is formed and reenter when the opposite signal occurs, a Golden Cross, the returns are in line with the long-term averages, but you have less drawdowns (and pain?) along the way.
To read our whole article about the Death Cross and our backtests, please read What is a Death Cross in trading? Does it work?
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