Perhaps one of the scariest sounding terms on Wall Street is the “death cross”. That combines two words that you never want to hear in your everyday life, but they have a particular meaning on Wall Street. If you play it a certain way you may even be able to profit from it.
The death cross comes from paying attention to moving averages on a particular security. It requires that you look at the technical factors that impact the performance of a security. The main thing to look at are the moving averages. These tell the story of how a particular security is doing.
In order to get the most accurate picture possible it is necessary to look at longer term and shorter term moving averages. A 50 day moving average versus a 100 day moving average can tell you the story of the death cross. If the 50 day average crosses below the 100 day moving average, then the death cross has been established and bearish signal has been confirmed.
The death cross means that the security may be breaking technical levels and be about to drop to even lower levels. If you decide to take advantage of this, you may want to short the stock in order to gain from the drop in the price.
What to Watch For
It is important to pay attention to the amount of volume that is related to the death cross. The higher the volume the more relevant the death cross is.
After all, if people are trading the security heavily then it means that they have conviction about the way that it is moving. Heavy selling is a strong sign that things may continue to drop in the price for some time to come.
While most traders do not necessarily trade in a short selling fashion, it can be good to at least know that the price may be about to drop regardless. If you are holding the stock long term you would still want to know if it is about to drop so you can sell off your shares before the price falls.