A Death Cross is essentially described when the short-term moving average of a stock or commodity crosses below the long-term moving average. The Death Cross is interpreted as a signal of weakness in the market and is often termed as bearish. This is because after a Death Cross has occurred, prices for the stock or commodity in trade are often believed to fall. In simpler terms, a Death Cross can be defined as a significant event where traders converge on a stock and decide on the basis of market forces whether sell or buy the stock. Since a Death Cross signifies a fall in the short-term moving average below the long-term moving average, it essentially translates to that the prices of a stock are going to fall in the short run while continue to rise in the long run.
Significance of Moving Averages
When performing technical analyses for a commodity or stock based on price, analysts would evaluate the statistics generated by the market using indicators such as past prices and volumes. A moving trend is one such indicator that helps in smoothening out the price and predicting the direction of the trend and determines the new support and resistance levels.
Importance of Support and Resistance Levels
When we talk about a Death Cross situation, it means a decisive downturn in the market. The long-term moving average becomes the resistance level for the market from that point onwards. A resistance level is the opposite of support level. It can be described as the ceiling confirming that prices always bounce off it. On the other hand, the Support level is considered as the flooring, which means the prices will notfall any lower than they already are.
Both, Support and Resistance Level help buyers and Sellers to converge on stock markets for trade. If a support level brings in more sellers than buyers, then the prices would fall below the flooring and become the new resistance level.
Similarly, in the case of a resistance level, if more buyers show up at the stock market then the prices will exceed the ceiling and become the new support level.