What is a Death Cross?
How a Death Cross Works
A crossover signal is generated when a shorter moving average crosses over a long-term one and visa versa.
As the name implies, the death cross is a highly bearish sign signifying that the current downtrend is likely to remain in force for a long period of time.
When a shorter-term moving average crosses below the longer-term, a technical analyst considers it a sell signal.
Different combinations of moving averages can be used. The 40-week moving average combined with the 10-week moving average is particularly valuable for indicating the long-term movement of a stock. Technical analysts believe that observing a cross in real time can, therefore, provide a very valuable buy or sell signal.
Circle #1) The first death cross occurred in early January 2008 when the 10-week moving average crossed below the 40-week moving average. From a high near $37, the stock fell to a low near $29 in less than month.
Circle #2) Just after hitting historical resistance around $36, the stock falters again. A death cross occurred as the 10-week moving average went below the 40-week. Within five months, the stock dropped to a low near $19.
Circle #3) In late July 2009, the stock managed to climb above the 10- and 40-week moving averages. A bullish golden cross appeared shortly after. Following the golden cross, AT&T rose from about $24.50 to $27.85, where it encountered significant resistance.
Why a Death Cross Matters
Technical analysis is based on the belief that past market trends can predict the future behavior for the market as a whole and for individual stocks, and a death cross is just another technical indicator used in this process.
If an investor can correctly interpret a chart's 'message' and predict a stock's movement, he or she can obviously make a lot of money. Certain aspects of technical analysis are controversial, such as the belief that stocks and markets move in trends that can play out over a long period of time and the contention that market action can detect shifts in supply/demand relationships.