Monday, July 5, 2010

Technical Analysis: Death Cross

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The talk this week for technician's has been the 'Death Cross', where the 50 day moving average crosses under it's 200ma- Golden Cross the reverse. Historically, this indicator has not been that reliable to use. According to Steve Goldman of Weeden & Co., there have been a total of 20 'Death Cross' signals since 1950 -- the S&P 500 was lower 55% of the time and, on average, slipped by only 0.5% one month later. Three months later, the S&P was, on average, +1.75% higher and lower less than 40% of those 20 data points. Fact, on only one occasion (October 1987 crash) after the dreaded 'Death Cross' did the index drop by over 15%.
According to Goldman:

In the six signals that occurred after the S&P had declined by more than 10%, the S&P declined by 2% one month later and was lower 50% of the time. But three months after the signal went into effect, the S&P advanced by 2% three months later and by 4.5% six months later. One year later, the S&P had advanced by an average of 9% and was higher 83% of the time. In other words, while the "Death Cross" has been in place in every bear market, "it does not mean that every time this happens a bear market occurs."

Here are a couple of links to reports on the 'Death Cross':
Market's Swoon Prompts Fears Of the Dreaded 'Death Cross'
S&P 500 Death Cross May Not Cause Rout, History Shows: Technical Analysis

Most technicians prefer to look @ the S&P 500, below is the $SPX as well as several other indexes.
One last note Doug Kass of SeaBreeze Partners, who I greatly respect, called a 'Classic Bottom' this past Thursday, he also called the March 2009 bottom.

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