The death cross and the golden cross are technical indicators that traders use in attempt to predict bearish and bullish market momentum, respectively. Both are breakout patterns formed when a short-term moving average either exceeds (in the case of a golden cross) or falls below (in the case of a death cross) a long-term moving average.
Both the death cross and the golden cross are types of crossovers, which take place when a short-term moving average crosses over a long-term moving average.
The two technical indicators both have three distinct phases. In the death cross, the first phase coincides with an upward trend coming to an end as buying interest dies out. However, the golden cross involves a downward trend dying out as selling interest deteriorates and then ceases to exist.
In the second phase, a breakout and new trend emerge as the short-term moving average crosses over the long-term moving average. While the shorter average surpasses the longer one in a golden cross, a death cross observes the exact opposite.
During the third phase, the newly formed trend can become more prolonged, resulting in either sustained gains because of a golden cross or continued losses following a death cross. The long-term moving average can serve as resistance for a death cross or support for a golden cross.
While drawn-out gains or losses could take place after these crossovers, more temporary trends might also take form. Technical analysts should keep in mind that breakouts based on longer moving averages frequently indicate trends that are more drawn-out and robust. In addition, these analysts can look at trading volumes. Generally, more robust trading volumes can help confirm a new trend. Of course, past performance is not indicative of future results.
Things To Consider
Some market observers believe that both the golden cross and death cross are lagging indicators and not leading indicators, meaning that they reveal market momentum after price movements take place. As a result, critics of these technical indicators believe they are not very effective at indicating what will take place so much as what has already happened.
Also, the momentum indicated by the golden cross or death cross could end up being temporary, in which case the market could change direction by the time a trader has the chance to make use of the information.
While the aforementioned concerns could undermine the usefulness of the golden cross and death cross as indicators, traders can use the two to help single out appealing entry and exit points. More specifically, they could use the death cross to point out low-price entry points. Alternatively, the golden cross could help traders get a better sense of when it is wise for them to sell and when it makes better sense to hold.
Both the death cross and the golden cross can help traders indicate market momentum. While these two can be helpful, technical analysts should remember that they are lagging indicators, and as a result, they can look to volumes to help shed more light into the strength of signals.
Traders may also use additional momentum indicators, such as the relative strength index, to get a better sense of when any uptrend or downtrend is either overbought or oversold. Technical analysts can benefit from keeping in mind that whether they are using the death cross or golden cross, the associated breakout will probably be stronger and more sustained if the crossover uses longer short-term and long-term moving averages.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…