Bitcoin’s (BTC) succession of sharp corrections from its all-time high at $64,900 has turned investor sentiment negative, at least for the short-term. While some analysts believe the bottom may have been hit, others are warning of a further fall due to the “Death Cross” pattern that, at the time of writing, is on the verge of completion.
For new traders, the name death cross itself brings a lot of negativity and a feeling of impending doom. This sentiment can trigger selling panics, especially if the market has already been going through a bear phase prior to the pattern being spotted.
However, is a death cross something to be feared or is it a crystal ball that gives traders insight on when a plunge is imminent?
Let’s find out with the help of a few examples.
What is a death cross and how accurate is it?
The death cross forms when a faster period moving average, usually the 50-day simple moving average, crosses below the longer-term moving average, generally the 200-day SMA.
The crossover is bearish as it shows that the uptrend has reversed direction. Large institutional investors generally do not buy in a falling market until a bottom is confirmed. Due to this, buying dries up and investors holding positions rush to the exit due to panic, exacerbating the decline.
Before looking at a few death cross examples in the crypto markets, let’s see how the pattern has affected the S&P 500 index between 1929 to 2019. According to Dorsey, Wright & Associates, LLC, the average fall after the formation of the death cross is 12.57% and the median fall is much lesser at 7.75%.
However, if only the post-1950 period is considered, the average fall is less than 10.37% and the median is at 5.38%.
While those figures are not startling, especially for volatility-accustomed crypto traders, the bearish convergence of these two moving averages should not be taken lightly.
History shows that the death cross has resulted in a few instances…