Hello, my friend and welcome to this tutorial on the Death Cross trading strategy. This is the first in a series of two videos on bullish/bearish markets using the death cross moving average trading strategy explained. Enjoy the video!

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Death Cross Video

Hello, my friend. Today, we are looking at having a death cross stock market action and, yes, it is officially here. We do have the ominous death cross stock market trading strategy – sounds like something out of Star Wars. Actually, it is a very well-known technical analysis pattern and it’s actually pretty darn simple, which makes it even that much more scary to some people, because when things are simple, a lot of people look at them, then they tend to have a self-fulfilling prophecy. And we’ll talk about that here in just a moment. But, first of all, what is the meaning of a death cross? It’s a couple of moving averages and, in general, you could say that it is when a short-term moving average crosses below a long-term moving average. But, normally, it’s referred to as two particularly moving averages and those two moving averages are the 50-period simple moving average right there and the 200 right there.

So the 50-simple moving average is the green one. The 200 is the magenta one on my charts and there we have it – boom, the death cross. This is on the S & P 500 by the way. Now, that normally is thought to signal a very bearish market, where people are freaking out say: oh we’re going to go down. Actually, let’s look at that a little bit, let’s look at it historically, and let’s see if that is actually true. Then I’ll give you some actual statistics. So let’s zoom all the way back as far as my charts will go.

Death Cross Trading

This would be the first death cross on this chart and, again, it is where the green moving average S & P or the 50 SMA crosses below the 200 SMA. So that is the actual point when you get the cross of the moving averages and I kind of like it when you do get the price coming back up into that, not a bad little short signal there because again those two particularly moving averages are watched by everybody. Part of it is a self-fulfilling prophecy that people are looking at these levels, therefore, they are buying and selling and taking profits and placing stops and all that kind of stuff around these areas. There’s no magic to technical analysis. A big part of it is mass psychology. But does it lead to a big bearish market? Well, let’s see – pretty bad, not too good, no bueno. So we go down from around 1400.

Yeah, that’s a big fall. That’s a big fall on the market, it dropped down and even further goes down below a thousand there. Comes back up, and still, we don’t get the cross. You know its price is going above, but that’s not what the pattern is there. It goes back down.

Went down to 800, so you know that would have kept us out of a world of pain way back there in 1999. That would have been a sweet thing to do. Alright, let’s look for the next death cross here and here’s where we get our next death cross. This time, the thing to note is that price keeps coming up and gets back above the moving averages.

Death Cross Pattern

One thing I want to say here very clearly and that I always say is that we never use any one tool by itself. No price pattern, no moving average, crossover, indicator, and candlestick bar, no one anything is going to give you a probability scenario. That includes the infamous death cross. So we get across here, but the market comes right back up and it keeps going up. So if you would have traded just purely on the death cross, you are screwed, so no bueno for that one all right!

But that’s why we don’t look at any one thing. We almost got a death cross here but not quiet. They don’t cross; remember moving averages are very slow, they’re lagging because they are averaging out. And here, especially, averaging out over the period of 50 and 200 bars, so really lagging. Another death cross, however, if you went short right there, they just said “I mean whenever there’s a death cross, I just automatically put a market order in and tell my broker to buy a bunch of naked puts” – really bad idea.

Really horrible idea. But anyway, if you just decided we need to be bearish whenever that happens, again, very wrong in that situation. So that signal did not work out well at all, and the thing goes screaming up, almost get a death cross there, and now we get one back here in 2008. Notice, again though, a similar pattern that we had in the last one that actually did work, so we get the cross of the moving averages. Price goes back up to them and then comes back down below them again and to me, that’s one of the things that you could look for if you want to trade these death crosses.

Death Cross Technical Analysis

So look at price action in relation to the moving average. I’m not a big proponent of moving average crossovers, but you know, again, you can use them in certain situations, just use them with other things. If you want to, by themselves, I don’t think they have a whole lot of meaning unless they’re major moving averages like these two which everybody looks at and then they become a self-fulfilling prophecy. And then what we just look at price action around them and then we make our trades. So, again, will it save you if you just stayed bullish during that whole time, yeah and that would have saved you a lot of money, this is not so good and we go into a nice bearish market.

We come back up. Now, another death cross there. Okay, all right now again: what happens there? Now look, we come back up into the 50 ma, it goes back down, comes back, and we’re getting a lot of choppiness, a lot of choppiness around this.

Probably because a lot of people are looking at the death cross and their guess is people are saying yeah, I’m going short when it comes up to the 50. Other people when it gets up to the 200, that’s when they are going short – plus we’re at this high here so they’re looking at that high and they’re going short off of that high. So this is the psychology. This is the reasoning that’s going on, and the death cross again is a very well-known pattern, but overall the market decides nope going to go up by the way. Another thing to look at here, which is very telling, is that when come down and make this what could happen so we just take out just barely take out the low of this swing low, which a lot of people are gonna, be looking.

Trading Death Cross

None of these bars, no the highs of these bars are actually below that low and that’s pretty typical of how the markets work just enough to kill the breakout traders right? People are gonna, say well I’ll tell you what I’m not gonna trade the retrace, I’m gonna trade the break out of that low and then they get slaughtered and that’s pretty much how the market likes to do it. The market is not your friend all right and then we come up another death cross.

Oh my goodness! Now, let’s see what happens well, if we don’t get to kind of retrace that we had before so it just kind of goes sideways. It doesn’t come all the way back up here in other words. That’s the pattern that we liked where we said “okay, that one served us well a couple of times in the past”. And so we don’t get that we.

And I tell you I don’t really love these patterns that just go straight to the downside. These very steep moves and then just trade a shallow retrace, in fact in Top Dog Trading, but we say you do not trade the first retrace and the trend after a parabolic move, and that’s exactly why. It goes back up. Oh, that’s right! We had this one here.

Death Cross Indicator

You can see the dates down here and this one again was a horrible one. But again we have another parabolic move down, a very strong vertical move down, and again, whatever patterns taught in Top Dog Trading is do not trade that first retrace after a parabolic move down. That is not a double bottom by the way. And then we go back on up and now look this is very interesting. Good, I got both of them on the chart at the same time, I forgot about this one.

So we got a death cross there and we get another death cross there. So this is the thing with moving averages. In general, they can provide some choppy signals like this. They’re very late, they’re very slow, and that’s why you don’t really trade moving average crossover much. Unless we retrace right into the cross, then I might trade those as long as everything else aligns.

But again, we don’t: parabolic move down, here’s the same principle, not going to short that for the exact same reason we already talked about, and then it’s back up off to the races, so those who have taken my Top Dog Trading course, you know what I’m talking about there. Now this is our next one. This time, notice that we did retrace right to the cross. So now what we’re dealing with all right so if you shorted that, that would have been a decent pattern to trade to go short. It worked out a couple of times for us. Now, you still got to manage your money, right?

Death Cross 50 200

You’ve got to manage your money, so don’t just assume that now this thing’s gonna tank for the next 25 years. Well, I’m sure it’s not, but that’s my opinion. However, if you took a quick short there and you took some profits; well, we’ve got support right here and that’s where we found support. And then we got a nice candlestick pattern there. We got resistance right here, so that’s what we’ve got going on in the market right now, quite frankly. We put in that high there, low there, high there, low there – basically in a sideways channel is what we are in and come off of that a little bit.

If I’m trading this, I’m definitely taking profits. In fact, in daily charts like this, I almost always take profits around the 50 and the 200 MA. If I’ve got a profit in the market, because the markets really do respect its levels as you can see over and over. Right now, that’s what we’ve got, that’s all we got. So nobody knows the future. If you have a bearish sentiment, that’s okay, but you know what I like to do is take some profits on the way to my long-term destination, and that way, if the long-term destination doesn’t turn out, I could still make a little bit of money or get a scratch trade. By the way, if you would have traded death crosses all the way back on the S & P 500 back to 1928 to the present.

Golden Cross Trading

According to the stats that I have seen, you basically I mean it wouldn’t have made much difference, we have costs and so forth. You might even come out a little bit worse than buy-and-hold. So if you’re looking for long-term stats on it, the stats that I found are back to 1928. It really did not outperform buy-and-hold when you incorporate expenses, which you have to do, obviously. But what it would have done is without volatility. So you wouldn’t have suffered those big down moves and that can be worth a lot, right? That could be worth peace of mind.

I’m gonna do a follow-up on this and in the follow-up video, we’re going to talk about the golden cross and well I’ll, leave that for the next video and keep you waiting that’s a little cliffhanger for you.

Wrapping Up!

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