The US stock market has seen a "death cross"! But this time the market may welcome a V-shaped reversal?
As the U.S. stock market faces a sell-off due to tariff issues, a "death cross" technical pattern has emerged, raising market concerns. Although this signal is typically seen as a precursor to a downward trend, historical data shows that buying at this time is often more advantageous. The S&P 500 has experienced 24 death crosses in the past 50 years, with 54% of those occurring after the largest decline. While there may be a short-term drop, there is a 60% probability of an increase 30 days later
According to Zhitong Finance APP, as the U.S. stock market faces sell-offs due to tariff issues, the emergence of the "death cross" technical pattern has once again raised market concerns. However, historical data indicates that this alarming technical signal does not necessarily mean that the stock market will face a more significant decline.
A "death cross" occurs when the 50-day moving average, viewed by technical analysts as a mid-term trend indicator, crosses below the 200-day moving average, which reflects the long-term trend. Technicians believe that this phenomenon signifies that a short-term adjustment may evolve into a long-term downtrend.
As of Monday's close, the 50-day moving average of the S&P 500 index was around 5748 points, while the 200-day moving average was at 5754 points. Although the benchmark index rose 0.8% on that day, it marked the first time since February 1, 2023, that the mid-term trend indicator fell below the long-term trend line.
Previously, the Nasdaq Composite Index had already experienced a "death cross" on Wednesday.
Adam Turnquist, Chief Technical Strategist at LPL Financial, stated, "This signal sounds very ominous in the stock market, but when you actually look back at historical cases of death crosses, choosing to buy at this time is often more advantageous than selling."
Looking back over approximately 50 years, the S&P 500 index has experienced 24 death crosses. Data analysis shows that in 54% of cases, this signal appeared after the index's largest intraday decline, indicating that the most severe drop had already occurred before the death cross formed.
In another 46% of cases, the sell-off continued to worsen, with the benchmark index averaging a decline of 19% from the death cross point.
This signal has indeed triggered severe declines. After death crosses occurred in 1981, 2000, and 2007, the market ultimately fell by 21%, 45%, and 55%, respectively.
Paul Ciana, a technical strategist at Bank of America, noted after studying nearly a century of data that the S&P 500 index has a 52% probability of declining within 20 days after a death cross, with an average decline of 0.5%. However, he added in a report on Monday that 30 days after the signal appears, the index has a 60% probability of rising, with an average increase of 0.8%.
Analysts indicate that the market has already undergone a considerable amount of selling— the S&P 500 index nearly confirmed a 20% technical bear market this month— and several bearish indicators, including the CBOE Volatility Index, have reached high levels, suggesting that the peak of the sell-off may have ended.
"In the past week, we have observed significant capitulation signals in the overall market," Turnquist said. "From a chart pattern perspective, I believe it is more likely that we will see a V-shaped recovery like in 2018 or 2020, rather than a prolonged decline."