The Dow Jones Industrial Average has been on an unrelenting upward trajectory since its October 2011 low.
The signal that convinced many traders that the market was now moving with a bullish bias was when the 50-day moving average of the index price rose above the 200-day moving average a couple of months later at the end of December.
Since then the market rallied 6,200 points to a high of 18,333 before pulling back to last night’s close of 17,404. That’s a gain of around 43% even though the market is 5% off its high.
But while most of the focus last night was on the 212 point, 1.21% fall in the Dow, technical traders have identified a reversal of the bullish sign the market gave back in December 2011 with the appearance of a ‘Death Cross’ in the Dow.
A death cross is a sell signal and simply the reversal of the buy sign seen in 2011. It’s where the faster moving average, the 50-day, slips below the slower moving average, the 200-day.
Because this trading style is based on the simple crossover of two moving averages of the price of an index – in this case the Dow, or a stock, bond, commodity or currency – it has no predictive ability for the size of any fall.
Not that it will be right in the long run. A sell signal right before the start of this bull run is a case in point.
But the track of this system on the daily Dow since 2008 would have returned traders who follow it blindly around 7,600 points. That’s a good return for an essentially passive trading system and it’s why so many traders watch for these types of moves.
That means this signal is an important one for the Dow, traders and global markets. It’s important for market psychology as well, because many traders will now say the Dow is heading into a bear market trend.
One thing worth noting is that in this instance the death cross also happens to have occurred when the Dow is testing the trendline from the 2011 low.
That’s doubly ominous.
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