Golden Cross vs. Death Cross: An Overview
A golden cross indicates that a long-term bull market is looming while a death cross signals a long-term bear market ahead. These two opposing trends influence the buy and sell decisions of stock market traders who rely on technical indicators.
Both a golden cross and a death cross confirm a long-term trend by indicating a short-term moving average crossing over a major long-term moving average.
The use of statistical analysis to make trading decisions is the core of technical analysis. At times, the trend lines on charts curve and cross, forming odd shapes with funny names like "cup with handle," "head and shoulders," and "double top." Technical traders recognize these patterns and what they portend for the future performance of a single stock or the entire market.
Key Takeaways
- A golden cross is a visual signal of a long-term bull market going forward, while a death cross suggests a long-term bear market.
- Either crossover is considered more significant when accompanied by high trading volume.
- Once the crossover occurs, the long-term moving average is considered a major support level(in the case of the golden cross) or resistance level(in the instance of the death cross) from that point forward.
- Either cross may occur as a signal of a trend change, but they more frequently occur as a strong confirmation of a change that has already taken place.
- Traders use both death crosses and golden crosses to help determine when to enter and exit an investment.
Golden Cross
The golden cross occurs when a short-term moving average crosses over a major long-term moving average to the upside. This happens when the short-term average trends up faster than the long-term average until they cross.
This is interpreted by analysts and traders as signaling a definitive upward turn in a market.
There are three stages to a golden cross:
- A downtrend that eventually ends as selling is depleted
- A second stage where the shorter moving average crosses up through the longer moving average
- Finally, the continuing uptrend, hopefully leading to higher prices
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Death Cross
The death cross is the exact opposite of the golden cross, signaling a decisive downturn in a market. The death cross occurs when the short-term average trends down and crosses the long-term average. That is, it's moving in the opposite direction of the golden cross.
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Special Considerations
Opinions vary as to precisely what constitutes a meaningful moving average crossover. Some analysts define it as a crossover of the 100-day moving average by the 50-day moving average; others define it as the crossover of the 200-day average by the 50-day average.
Analysts also watch for the crossover occurring on lower time frame charts as confirmation of a strong, ongoing trend.
Regardless of variations in the precise definition or the time frame applied, the term always refers to a short-term moving average crossing over a major long-term moving average.
How Do You Calculate a Golden Cross?
The 200-day moving average and the 50-day moving average are tracked over time, as in the chart above. A golden cross occurs if the 50-day moving average crosses the 200-day moving average on an upward trend.
Is a Death Cross a Good Time to Buy?
A death cross signals a bearish market. Many investors buy stocks when their prices have dropped with the expectation that they will go up again in the future. This strategy relies on the fact that a bear market drags down nearly all stocks, good and bad.
The key to making money in stocks is picking the ones that are undervalued for whatever reasons. If you buy the right stock on a dip, you'll get a return on your investment.
What Timeframe Is Best for a Golden Cross?
The 50-day moving average is the most commonly used indicator when watching for a golden cross or a death cross.
Golden crosses can be analyzed under many different time frames depending on the trader and what is being analyzed. Day traders use very brief time frames, such as five minutes or 10 minutes. Swing traders use longer time frames, such as five hours or 10 hours.
The Bottom Line
Golden crosses and death crosses are market signals observed by technical analysts. A golden cross signals a bull market and a death cross signals a bear market.
Both of these are determined by the confirmation of a long-term trend from the occurrence of a short-term moving average crossing over a major long-term moving average. Both crosses help traders in making investment decisions.
