Death Cross History

The death cross is interesting not because it has much predictive power but because it has been widely perceived as predictive, and can spook the herd. Yet I wonder if in the age of the Internet is the herd so easily moved? Whereas in the past (about a decade ago!) investors would be heavily influenced by brokers, or simply rely on mutual fund managers, today there is a great flood of commentary pummeling the attentive. In the past week there has been a stampede of death cross comments, most of which pointing out its self-congratulately character: when the cross occurs, the trend is already pretty clear, so what does it add? 

 

The last Death Cross occurred in Dec 2007, right at the start of the big drop; and the last Golden Cross happened in June 2009, shortly after the Hope Rally kicked off, confirming a longer trend up. In both cases it would have given guidance to ride the trend. Many clever contrarians who thought the Hope Rally would end at its first peak in June 2009 were shown up fairly quickly; and the great mass of fervent fundamentalists who dismissed the warning sign in late 2007 lost an Ark's worth of wealth over the next year. With recent 20:20 hindsight, the Crosses look pretty useful. 

This hasn't stopped the fundamentalist sheep dogs trying to keep the herd away from technical analysis. The WSJ proffered a debunking a few days ago, using an interview with Pierre Lapointe, global macro strategist at Brockhouse Cooper, who said:

The death cross IS nonsense. They’re no better than a flip of a coin to predict future returns. Check out these odds: Since 1970, only 10 of the 21 occurrences actually resulted in a market pullback a month after the death cross. Three months later, the market was down only 43% of the time.

This morning they had a slightly less breezy market note:

Such a death cross has also marked every other bear market since 1972, notes Ed Yardeni, president of Yardeni Research. And the market's 50-day average is currently less than 1% above this tipping point.

Dow Jones ran a more considered piece that look into the stats, concluding:

There have been nine occasions when the 50-day moving average crossed the 200-day moving average since 1998, and five could be considered false signals. One might say they seem pretty good at marking contrarian turning points.

The particular market analyst went on to note the bigger head & shoulders pattern shown in my prior post, and added that breaching the neckline (which we have done) with the death cross pretty well confirms a deeper drop. Overall the point was that a Death Cross in itself doesn't say much (other than that the herd might be spooked) but in concert with other indicators can give guidance. I agree with that - none of these indicators in isolation is worth that much, but the bundle of indicators can predict market direction. What I get amused by in this case is combining the self-congratulatory Death Cross with the often-seen and seldom-realized head & shoulders: dumb and dumberer so to speak. 

But if they spook the herd, they can be acted upon. We should get a really good test in a couple of days: will a Death Cross spur a bearish dump? Or, if the Internet has leveled the paying field between "experts" and investors, we might see the herd fading the experts, in effect betting for a bounce just when the "experts" say they should be spooked. 

Over at The Big Picture, from the Chart Store we have some deeper stats on Death Crosses. Two charts are presented, one where the 200 DMA is still rising (as it was in Dec 2007) and other where it is falling and the 50 DMA catches up (as we see now):

  

If we return to Pierre's comments on the Death Cross, he does add that there have been nearly two dozen death crosses over the past four decades, and the S&P has declined by 0.4% on average one month after such a formation. After six months, on the other hand, the market on average had gained nearly 5%. Here is how he continued:

Fundamentals is the only way to go… until risk moves investors’ attention away from them. And this is where we stand right now. Risk is dominating. The global economy is in much better shape than it was in 2007 before the credit crisis and global recession: home prices are much lower and less of threat; mortgage rates are at all-time lows; and companies are back in hiring mode (albeit at a slow pace). But investors are parked on the sidelines.

Funny comments! The world is in better shape after the greatest drop since the 1930s in the global economy? Such is the wisdom from fundamentals. The corner is always about to be turned. 

In bull markets, investors rely on fundamentals - why not? everything is going up. In bear markets, they turn to technicals - especially when they get tired of being told to buy the dips because happy days are almost here again. At a real bottom they don't listen to the siren calls of brokers at all, and that is the time to buy back in. 

Comments

[Roger D.]

Not very encouraging for the bulls today as the market huffed and puffed most of the day but could not vault above the important 9750-60 restistance.

I have this counted as a ultra bearish 1 and 2 with another leg down tomorrow.

Cheers,

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/0714fc00-8683-4a45-bf82-7ca928cca48d

[da bear]

The Elliott Wave Financial Forecast is coming out tomorrow.
Should be a bearish report.
That could be short-term bullish.

Any rally here would be a wave e of 2.
otherwise wave 3 of 3 of 3 has begun.

Stocks, metals, and the dollar were all down today. How is that possible?

da bear

Beyond Possibilities.

[Micky D.]

It is here, the often anticipated, but rarely realized, big one: The THIRD of the 3rd of 3, which itself is a Three of a iii off of the Grand Cardinal Top (back to the Mayan Empire).

Zooming in a little closer, we have a possible 3 of 3 of 3 of iii on the 60 min, and a 3 of 3 of III coming on the 5 minute. It doesn't get any better than this.

Target: S & P low of 666 (divided by 2 is 333!). Eerie!

Micky D.

[Mamma Boom Boom]

This triangle sets the stage for an explosion, like a rocket ascending upon a star...

[Michael]

The SPX trades down to the 38.2% retracement at 1010 and bounces a very tradeable 20 handles . . .

Meanwhile, I don't think that I've ever seen the mass financial media pick-up on an "indicator" like the way they've focused on the "Death Cross" in my 30 years as a trader.

I think that CNBC must have mentioned it about 50 times today during their broadcast!

When it crosses tomorrow, that should mark yet another tradeable LOW.

[Steven_737]

"Stocks, metals, and the dollar were all down today. How is that possible?"

da bear;

4 possible reasons I can think of:
1) shifting from correlations-based trading, because of new realities sinking in; in other words "house traders" realizing that the conditions for the correlation to continue to function are not in place, have changed the model - modus operandi for the computers providing liquidity and quotes
2) anticipation of money withdrawals from mutual funds and hedge funds, proactive liquidation to meet cash demand in some markets regardless of their trend.
3) some wavers (or technicians in general) have a forecast for an interim (?) top in precious metals and USD, therefore taking profits
4) a fluke that happens every once in a while

Duncan, what do you think?

[da bear]

Mickey D.,

yeah, this could be a biggie bad bear market. Like Millennial Wave 4 instead of Grand Super Cycle Wave 4.

Well, let's just go with the Financial Forecast alternate count tomorrow and call it a day.

da bear

P.S. An 'e' of 2 up starting tomorrow would fool everyone, but the count would look totally screwed up. But the flip side is that the start of 3 of 3 of 3 of 3 of 3 of 3 of 3 of 3 down would be the 'F' wave. lol

[JT]

Da Bear,

Looks like someone "unwound" their long Gold / short Euro trade today.

:)

[JT]

Cumulative NYSE A/D line is back to the lows of June 7th, yet the S&P is quite a bit lower. That's a potential positive divergence for a turn back up.

[Roger D.]

Gold has been making top for the last 7 weeks, nothing surprising there. What was surprising was the rocket up by the Euro and the Dow couldn't even get of the mat. A month ago that would have been good for 200 pts.

Was today the bounce before the big one...a one day wonder in a lot of stocks at critical support. Hmmmm.

Roger D.

[Roger D.]

Many stocks are in this exact same position.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/acaee6f1-26f3-476d-8b48-1a0169c5c7b6

[Roger D.]

BIDU 15 minute

By this count tomorrow is down, and next week too.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/b74ee799-f47e-485b-8987-da4fc247ddd8

[daniel G]

Over here in OZ I am looking for a 5% bounce over the next few weeks. Would expect to see something similar in the US. With US corporate bonds not participating in the sell-off I still think we have not seen the top of wave B, though I do favor a lower high for the terminus.

[molecool]

See - everyone is asking the wrong question. Because moving averages are by their nature out of context as they are based on AVERAGES. They don't account for polarity and distribution. Which is why one needs to look at something like the SPXA50R or SPX200R - which I posted previously and are based on MEDIAN. Here's the longest time frame I can find and it rarely fails - at least in the past eight years:

http://screencast.com/t/NWEyYTAwYjM

If you share this chart, please give credit - thanks.

[Steven_737]

usdollar

Thank you for explaining what the webbot text is all about, (I was only guessing what the words meant - what else was possible?) and providing reasoning for its credibility .

If you care to discuss this further, here are a few of thoughts:

1) regarding financial forecasting, there exist a lot of fora and websites, where traders and analysts using several models try to pin point turns in the markets. This is not news to you (LOL).

Furthermore there exist analysts that use financial astrology explicitly like Arch Crawford and the Delta Phenomenon people, or implicitly like the Bradley model that is in essence a "sterilized" astrological model.

The webbot software collects that information and seeks to find patterns in the predictions or confluence of dates, that are derived by the different models used.

2) Regarding global events, either geopolitical or weather, earthquakes, other physical phenomena, or even elections, there are plenty of astrology websites and blogs that are looking at the astrological patterns and try to forecast these events.

There exist also enough scientific fora and politics - business - geopolitics blogs & websites that comment on the respective topics.

The webbot software collects that information and seeks to find patterns in the predictions or confluence of dates, that are derived by the different astrology models and/or interpretation logic used. Also to combine - bridge these topics with information and data from scientifically oriented sites, news reporting sites and politics related fora.

3) On several blogs people post messages just to communicate with "web friends" or just to pick arguments and amuse themselves. These messages comment on the forecasts - predictions and to a great percentage do not add valuable information, but are still likely to generate "critical mass" if the topic catches the fancy of many posters - commentators.

The webbot software identifies topics of interest, i.e. the hot items in the peoples discussions. Then they present those statistical results using buzzwords - selected by their marketing person - and weird syntax in order to impress their audience.

The weird syntax and buzzwords are also useful in not spelling out exactly what the supposed forecast event is. This way every reader can interpret each sentence to his liking and close to his preconceived notions.

Finally they do not need a disclaimer (like financial fora or websites), but to be "safe from criticism" they have come up with the slogan:
"Now it is up to you to decide what will occur, and how. "

Hey good stuff!
A Reader's Digest with a twist of predictions!

My point of view is that:

if one needs financial forecasting, one can read and participate in financial - trading fora and blogs and follow the analysis and forecasts there, while at the same time be informed of how the forecasts are derived.

if one needs weather - earthquake - physical phenomena and geopolitics "predictions", one is better served by reading and participating in astrology fora and blogs and follow the analysis and predictions there, while at the same time be informed of how the predictions are derived.

Of course reading of scientific websites that address weather - earthquake - physical phenomena and geopolitics is also necessary so as to understand the facts and not to be "fooled" by "extreme" predictions.

I suppose that I could add paragraphs on comets and planets that will destroy the earth (Nibiru etc), UFOs, Maya calendar and so forth but I think that I have already described my point of view clearly.

What do you think?

cheers

I would like to read any additional thoughts on this topic.

Duncan, it may seem a little off-topic on your blog, but if people that follow Elliott wave analysis and forecasts, "need" predictions from the webbot, then I think it is worthwhile to understand why.

[yelnick]

Steven737, discussions of using the web to discern investor psychology is not off topic at all. Webbots are one way. Friends of mine have played with google trends on companies/products, and I suppose are now looking at tweets for the same purpose.

[yelnick]

daniel G, with USD falling all of a sudden, we might see a rebound in AUD and a spurt to the ASX. Question for you is how the bad news from china (slowing down, real estate bubble, etc) is affecting the ASX / mood in Oz?

[usdollar]

Steven, their dates have been pretty sensational.

Normally if something is event driven, the event itself is normally something unexpected. I follow the money first, which is the USD. Going back to early 80s, or back to early 1900, it looks like Usd is in its 5th wave down, and it also looks like an ending diagonal where we now should be in 4 up (98ish top). Then we should go down to about 60 on index+- before it rockets straight up DEFLATION. I believe it is more a matter of if the currency will hold up without any backing (we the people). So I believe that silver will come in very soon to exchange it, not tommorrow, but when the big H&S take the markets down to zero during 2012, no one will take usd, or it will get unbeliavably strong. It will be interesting to follow silver in the giant crash I believe we will see in Nov.

[usdollar]

http://www.safehaven.com/article/17352/sultans-of-swap-bp-potentially-more-devastating-than-lehman
Maybe it will be enough if BP goes POFF!

[daniel G]

Hey Yelnick,

I don't think it has really registered at all. Property auction clearance rates are falling quite bad (the chinese have been big buyers recently here) so this should filter through to prices soon. Here in Townsville (which benefits a lot from resource activity) prices have fallen maybe 10 - 20% as far as I am aware and some of the higher priced units at Maggie Island - a little island not far from townsville - maybe 30 to 40%. The weakness in our market is primarily attributable to actual deflation (a decrease in the money supply). There is still delusion that China will save us. The unstoppable resources boom was the underlying premise of the RSPT. It will get ugly when the realisation that China is a funny money story sinks in. Taz

[Mr. Panic]

Doing my own informal webbot search of chatter on the web, it's seems like everyone is bullish. Hardened bears have covered shorts expecting a rally and thinking about participating on the long side. Everyone else thinks the market has put in a bottom. No one is worried about the jobs report numbers tomorrow. Most of the cyclist calling for a rally for the next few days; others saying that the trading days around the holidays should be bullish or the holiday should produce a trend change. The last two days I have been looking for a bounce after an early morning low that would take the averages up to their downtrending shorter term averages where I could add to my short positions but the markets haven't complied. But today's action was even worse since we got an early morning drop followed by a bounce but the SP couldn't penetrate the previous support at 1029 three times and never ventured into positive territory. In 1929,1987, and 1930 once the DJIA/SP penetrated the previous level of support/ first low off the high, the support was penetrated slightly before producing a decent bounce. So far that hasn't happened.(It might wait till the Russell gets to its Feb lows but that's the last stand) And I am not sure that is going to happen considering all the bullish chatter I am hearing on the web.
ISEE all equities put call ratio had its highest reading today since the April highs at 200 matching the 200 reading from the previous big up date on June 15 and slightly above 197 reading from June 25 when it appeared everyone was calling a bottom including Neely. Atilla after writing that he wouldn't go long announced he has entered a long ES position and is looking for a rally to SP1200 by October.
Meanwhile McClellan Oscillator is on the verge of a major breakdown. It needs a rally tomorrow to keep its neckline appear somewhat intact(in the head and shoulders pattern). By the way, many saying $nymo divergence here with the new lows; that's true if the market bottoms and rallies here; but it can still keep on dropping. Summation Index is approaching its critical milestone where all the big action takes place to the downside.
Another thing that probably has the bulls in a frenzied state is the correction off the April high seems to be an exact duplicate of the Jan-Feb correction at its current state albeit a larger version of it.

[usdollar]

The timing of option trades I believe is the toughest part, ie the dates in where to trade, so I try to have as much confirmations/info as possible before I trade. For example, do I buy a majority of July puts (dirt cheap), or the majority of Aug Puts etc. How do you approach this Steven?

[yelnick]

Panic, interesting observations. Most folk around here are not attentive to the growing negative news and possible panic among central bankers.

[MARK HOLSCHER]

THE WEBBOT PROJECT HAS SOME ELEMENT OF THE TRUTH. THAT TRUTH IS BASED ON THE LIE, THE LIE IS THE DELUSION, PEOPLE BELIEVE THE DELUSION, WHICH IS WHY THERE ARE BUBBLES.
http://knol.google.com/k/mark-holscher/market-timmmmmmming-ii/13nmdnwfdknux/198#

[Mr. Panic]

Another thing I forgot to mention is that cumulative tick on the Nasdaq 100 made an alltime high on Wednesday on a day when the $NDX was DOWN 1% per Cobra through probably Sentiment Trader. Those cumulative ticks highs have been correlateing with tops over the last several weeks. I saw another cumulative tick chart based on the 10min ticks 200 average and that has been rallying over the last several days while the market has been dropping. If the market is up at all tomorrow morning that average should approach the last two peaks made during the last 2 months(which of course correlate with imminent tops.
I am also following the cyclist Helge in real time at the moment since many are basing their hopes for a huge rally over the next week on his graphs. Supposedly they are calling for a huge rally but all I see is that afterhours activity should be causing a surge tonight and so far all I have seen is 6 point SP rally that since has fizzled. (According to Helge's charts they should give up their gains by the open anyway...but the charts have predicted huge surges the last couple of days that haven't materialized)

------On a side note, BP has been sporting the Enron death spiral chart pattern and BP severely underperformed the other oil majors during the 2002-2008 oil mini bubble so I wouldn't be surprised if there are offshore entities hidden in the books. (which is set to resume once Obama makes sure all offshore drilling is banned and the dollar tanks per Lindsay William's predictions)

[adg]

waiting for a crash, 1000-2000 pts drop in DJIA today

[Account Deleted]

EUR/USD after breaking out is taking a pause
http://niftychartsandpatterns.blogspot.com/2010/07/eurusd-is-taking-pause-after-break-out.html

[Steven_737]

http://www.zerohedge.com/article/guest-post-sultans-swap-bp-potentially-more-devastating-lehman

[Steven_737]

conclusions stated in above article:

what do you think Duncan?                                      

[BS Prechter]

"THE WEBBOT PROJECT HAS SOME ELEMENT OF THE TRUTH. THAT TRUTH IS BASED ON THE LIE, THE LIE IS THE DELUSION, PEOPLE BELIEVE THE DELUSION, WHICH IS WHY THERE ARE BUBBLES.
http://knol.google.com/k/mark-holscher/market-timmmmmmming-ii/13nmdnwfdknux/198#

Posted by: MARK HORSESHIT | Thursday, July 01, 2010 at 10:04 PM."

You should go work at EWI, they could use someone like you

[Roger D.]

Five waves up in the Euro with a triangle. Hmmmm

Market looks week here,so maybe that "c" up in BIDU is correct and we are topping for a big move down.

Roger D.

[Roger D.]

The Euro.

IIRC, Bob Prechter was on CNBC recently and said that the Euro should retrace to the 1.26 area before starting down again. The kiss of death or??

http://www.screencast.com/users/parisgnome/folders/Default/media/f1e03238-8152-4e0e-9086-87d7d2b7a273

Roger D.

[Roger D.]

JNK

http://www.screencast.com/users/parisgnome/folders/Default/media/851cb077-baf2-4708-bc22-c32a3d20c8e4

[usdollar]

The scenario for the dollar to strenghten in Nov. should be BP poff, England semi poff, dragging Euro down poff, chain reaction, Nuked financial system, and 2000 djia will look much more attractive than 8000.
So now it is just a matter if we are in wave 2, or wave 3-3-3-3-3-3-3-3-3-3-3?

[Roger D.]

Euro topped???

[Mamma Boom Boom]

Looks like we might test the low, this afternoon. Then, next week it's off to the races.

[Roger D.]

Mamma not if the Euro makes top,whether today or Sunday night. If so this market will break badly.

Roger D.

[Roger D.]

The banks come in and bought the REITS at the low,exeting a rally.

[Steven_737]

Any updates from cycle studies?

from Hurst cycles and related periodgrams??

I have the impression that the weak price action today is a wave ii struggling to go higher but not achieving it.

If this is correct, this is ii of 3, and iii of 3 is around the corner.

[Steven_737]

OR perhaps ES needs to touch 1000 to attract buyers !

S1 today is 1008.75
while S2 is at 995.5

SPX= ES + 4.5 approximately

Maybe SPX 1000 is what the market has in mind for a bounce...

[Steven_737]

OR SPX 999 is the signal to short into iii of 3

[Steven_737]

what's that slogan again ???

"Now it is up to you to decide what will occur, and how. "

[Roger D.]

The Euro might have 1 down,and the Dow's tracking almost tick for tick.

[usdollar]

Steven what instruments are you using to time the market?

[Mamma Boom Boom]

>Mamma not if the Euro makes top,whether today or Sunday night. If so this market will break badly.

Roger D.<

Markets are only inter-related until they're not.

[Steven_737]

usdollar;

it is on my charts: macd(3,10,16)

on multiple time frames;

[yelnick]

Steven737, the ZH article on BP derivatives is gross speculation. No data just fear. Lehman was in the middle of both sides on many deals whereas BP is just on its own positions. A lot of these derivative bets will go sour in the next few years and it will hurt, but nothing like Lehman. The banksters in the middle have a much more dangerous hold on a market, and hence need to be regulated, than speculators on one side.

[Roger D.]

Transports have 5 down and so far,no bounce.

[Roger D.]

If the market heads down,looks like the transorts will lead the way down.

[Mr. Panic]

Hedge funds should be adding to shorts as it is apparent that the SP1070 will not be breached by the close thus giving off most likely a weekly sell signal based on DeMark. That's why I have felt Friday could be a bloody day despite it being a pre-holiday session. Don't be surprised to see a violent drop into the close. I already see five waves off the high in the SP. Might have to wait for the SP to tag its 10period average on the 60 minute.