Monday, August 15, 2011

The Death Cross

Have you seen the Death Cross in the $SPX? This is where the 50dma crosses down over the 200dma and is said to predict bear markets. It seems natural, right? After all, if stocks are going from a bull market, where the 50dma is above the 200dma, it makes sense that if the market were on its way to a 20% or greater decline, it's just a matter of time before the 50dma crosses down below the 200dma.

As they say, the Death Cross has predicted 10 of the last 3 bear markets.

Another thing they say is that bull markets live above the 200dma and bear markets live below the 200dma. That's another one that seems rather obvious and most of the time too late to act upon it.

As the column mentions, there have been whipsaws in the indicator, and that's where it hits a snag. How many times does one get whipsawed around for 5-10% trying to avoid the 20% loss?

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