The previous three death crosses have produced sharp losses
A rare “death cross” appeared Tuesday in the chart of the Dow Jones Industrial Average, suggesting the stock market may have already begun a new long-term downtrend.
Although chart watchers have seen the bearish technical pattern coming for some time, it can still send a chill down bulls’ spines when it is finally confirmed.
The fact that the Dow industrials’ DJIA, -1.21% death cross follows the appearance of one in its sister index, the Dow Jones Transportation Average DJT, -0.66% , warns that this one is more than a one-off event.
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A death cross is said to have occurred when the 50-day simple moving average, which many use to track the short-term trend, crosses below the 200-day moving average, which is widely used to gauge the health of the longer-term trend. For the Dow industrials, it marked the first time the 50-day moving average, which ended Tuesday at 17,806.99, was below the 200-day moving average, at 17,813.42, since Dec. 30, 2011, according to FactSet.
Therefore, many technicians see the death cross as marking the spot that a shorter-term pullback morphs into a longer-term downtrend.
The Dow closed down 1.2% suffer an eighth loss in the past nine sessions. It has lost 5% since its record close of 18,312.39 on May 19.
Some argue that death crosses have very little predictive value, since some previous ones have appeared right around market bottoms. For example, a death cross appeared on July 7, 2010, when the Dow closed at 10,018.28. The Dow’s closing low for the year had actually been hit two sessions earlier, at 9,686.48.
But the Dow fell another 5.9% over six weeks after the Aug. 24, 2011, death cross, and tumbled as much as 50% over 14 months after the one appearing on Jan. 3, 2008.
And since the Dow transports’ latest death cross appeared on May 26, it dropped as much as 4.2% through July 8, before recovering slightly. The index is still down about 0.1% since the bearish pattern appeared.
The following is the death-cross situation for other market benchmarks:
• The S&P 500 Index’s SPX, -0.96% 50-day moving average (or “MA”) was at 2,095.69 and falling by nearly a point a day, while the 200-day MA was at 2,074.80 and rising by nearly a point a day.
• The NYSE Composite NYA, -0.95% also produced a death cross Tuesday, as the 50-day MA (10,918.55) moved below the 200-day MA (10,922.10) for the first time since Feb. 26.
• The Nasdaq Composite’s COMP, -1.27% 50-day MA (5,078.91) was still well above the 200-day MA (4,895.64).
