The S&P 500 ended Monday on a rather ominous note, forming what is known as a technical ‘Death Cross,’ a chart pattern that is often seen as an indicator of a transition from a bull market to a bear market.
What Happened: On Monday, the S&P 500’s 50-day moving average, often seen as an indicator of near-term trend, slipped below its 200-day moving average, which indicates long-term trend. Technical analysts view this as a sign of reversal, a point where short corrections can turn into lasting trends.
Traders flagged similar chart patterns in the Nasdaq 100 index on Wednesday, as well as the small-cap focused Russell 2000 index, which saw the pattern nearly a month ago.
For the S&P, this is the first death cross in three years, the most recent one being in March 2022, following which the benchmark experienced immense volatility and declined 18% by October 2022, and 25% from its peak in January 2022, officially confirming its entry into bearish territory (a drop of 20% or more).
Why It Matters: According to analysts, the death cross is usually a “Lagging Indicator,” which means that it confirms trends that have already occurred. Craig Johnson, a chief market technician at Piper Sandler Companies PIPR told MarketWatch that instead of signaling more losses, they signal a “snap back” rally.
In a note analyzing nearly 100 years of data, Paul Ciana, a technical strategist at Bank of America Corp. BAC, wrote that in 52% of the time that this pattern occurred, the average losses stood at a mere 0.5%, according to the report.
Ciana adds that while death crosses have been “inconclusive overall,” there is one critical tell, whether the 200-day moving average at the close has fallen for the past 5 trading days. This indicates that there is more room for “stocks to drift lower in the immediate future,” as reported by MarketWatch.
A Reuters analysis, spanning 50 years, shows that the S&P 500 has seen 24 such death crosses, and only in about 46% of cases the selloff worsened after the pattern was seen, with an average decline of 19%.
Price Action: The SPDR S&P 500 ETF Trust SPY is down 3.6% this month so far, followed by the Invesco QQQ Trust QQQ which tracks the Nasdaq 100 index, and the SPDR Dow Jones Industrial Average ETF Trust DIA down by 2.4% and 3.4%, respectively, so far this month.
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