A death cross is a bearish technical trading signal that occurs when the 50-day moving average drops below the 200-day moving average, signaling a significant sell-off.
Understanding the Death Cross in Cryptocurrency
A death cross materializes when a slower-moving average crosses the faster-moving average in an upward direction. Day traders commonly use the 50-day and 200-day moving averages. For a death cross to form on trading charts, the slower-moving average must cross the faster-moving average from below.
While death crosses can also be observed in 5-day and 15-day averages, longer periods tend to be more reliable, offering stronger signals for assets, stocks, or cryptocurrencies.
Identifying key stages of a death cross is crucial to pinpoint the optimal exit time from the market before the onset of a bearish trend.
There are three main stages in a death cross
Consolidation or Sharp Drop
The asset's price either consolidates or sharply declines after an extended uptrend. The consolidation phase often signals waning momentum in the current uptrend, hinting at an impending trend reversal. Throughout this stage, the 50-day moving average stays above the 200-day moving average.
Crossing of Averages
The second stage marks the precise moment when the 50-day moving average descends and crosses the 200-day moving average. This formation constitutes a death cross and signifies a bearish trend for the asset.
Downfall and Downtrend
The third stage witnesses a decline in the asset's price, creating a downtrend. Following this stage, the price typically continues to trade below the 50-day moving average.
Source: schoolstockcharts
Observe how the graph moved horizontally when the yellow line (representing the 50-day moving average) was above the purple line (the 200-day moving average). When the 200-day moving average crosses the 50-day moving average from below, a death cross forms, triggering a subsequent price drop. The price may recover slightly when a golden cross is formed.
Accuracy of the Death Cross
The death cross usually occurs amid falling prices, yet it doesn't definitively indicate the end of a bull market. Instances exist where a death cross appeared, and the price only experienced a slight decline, later recovering and surpassing previous all-time highs.
Interpretation Divergence
This divergence in interpretation is why financial analysts differ on setting moving averages to identify a death cross. Some adhere to the classic 200-day and 50-day averages, while others find the crossover of the 100-day moving average over the 30-day moving average a reliable indicator for a death cross and the commencement of a potential bearish trend.
Conclusion
Similar to any technical indicator, relying solely on the death cross is not a recommended strategy. Financial analysts suggest using a variety of technical indicators to comprehend price and volume activity from diverse perspectives before making informed decisions to buy or sell an asset, stock, or cryptocurrency.
Such indicators encompass, but are not limited to, the accumulation/distribution indicator, on-balance volume (OBV), relative strength index (RSI), moving average convergence divergence (MACD), and the stochastic oscillator.
Also Read
Understanding Support and Resistance: The Key to Successful Crypto Asset Trading
What is the Bitcoin Misery Index (BMI)?
What is the Relative Strength Index (RSI)
What is Algo Trading (Algorithmic Trading), its Features and How to Use It
DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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