The Death Cross Will Happen

"The charts don't lie" is a common phrase that exists amongst traders. It is an accurate, but not guarantee, barometer of investor sentiment and long-term concerns or beliefs. The charts on the S&P 500 and the Dow Jones have continued to show bearish signals since the start of May.

In the middle of May, I noted that the 200-day moving average was breached by all the major North American exchanges (see link) and discussed in a technical analysis blog about the functions of the moving average (see link). Since that date, the Dow Jones has fallen about 1,000 points. And now, we have two big signals the market may fall a little more.

Yesterday, the S&P 500, the Dow Jones, and the NASDAQ all hit 2010 lows, with more lows reached today. The S&P 500 had a key support level at 1,040 which was breached to the downside, indicating further drops to follow. And today, the market is now watching an upcoming death cross.

The death cross, which occurs when the 50-day moving average drops below the 200-day moving average, is a sign that stocks or asset classes will fall further, hence the name. Although the event has not yet occurred, it is fair to say this will happen in the next few days. Mathematically, the Dow Jones must move up 2,000 points in the next day to reverse the falling 50-day average. If you check the charts, the 2-week upward run in June of 800 points did not deflect the 50-day average.



I am anticipating the death cross to occur next week. We may see traders or firms try to delay the event by pushing the market up, even if tomorrow's job reports is positive, but the negative sentiment will take over.

It would be a wise decision to purchase some insurance or write in-the-money calls until a real turn around in the fundamentals is evident.