Bitcoin (Bitcoin) The successive sharp corrections from the all-time high of $64,900 have made investor sentiment negative, at least in the short term. While some analysts believe that the bottom may have bottomed, others have warned that due to the “death cross” pattern, the pattern is about to be completed at the time of writing.
For new traders, the name Death Cross itself brings a lot of negative emotions and feelings of imminent doom. This sentiment can trigger a sell-off panic, especially if the market has gone through a bear market phase before discovering the pattern.
However, is the death cross something terrifying, or is it a crystal ball that gives traders insight into when the plunge is coming?
Let us find out through a few examples.
What is the death cross and how accurate is it?
When the faster periodic moving average (usually the 50-day simple moving average) is lower than the long-term moving average (usually the 200-day average), a death cross is formed.
The crossover is bearish because it shows that the uptrend has reversed direction. Until the bottom is confirmed, large institutional investors usually do not buy in a falling market. As a result, buying orders dried up, and investors holding positions rushed to exit due to panic, exacerbating the decline.
Before looking at some examples of death crossovers in the crypto market, let’s see how this pattern affected the S&P 500 index from 1929 to 2019. According to Dorsey, Wright & Associates, LLC, Average The drop after death cross formation was 12.57%, and the median drop was much smaller at 7.75%.
However, if only the post-1950 period is considered, the average drop is less than 10.37%, and the median is 5.38%.
Although these numbers are not surprising, especially for cryptocurrency traders who are accustomed to volatility, the bearish convergence of the two moving averages should not be taken lightly.
History shows that death crosses have caused some sharp declines in the U.S. stock market index.
After the death cross on June 19, 1930, the S&P 500 index plummeted 78.84%, and then bottomed on September 15, 1932. The next terrible death cross occurred in the 53.44% pullback from December 19, 2007 to June 17, 2009.
This shows that in some cases, death crosses can predict sharp corrections. However, in 90 years of history, two sharp drops of more than 50% indicate that this model is not reliable enough to make traders immediately fearful.
The recent Bitcoin death cross
Since cryptocurrency is still an emerging market, the available data is limited. Let’s review a few examples of death crossovers and how it affects Bitcoin.
The most recent death cross occurred on March 26, 2020, when the BTC/USD pair closed at $6,758.18. However, this death cross proved to be a good reverse buy signal because the currency pair has formed a two-week bottom at $3,858 on March 13.
Prior to this, the currency pair formed a death cross on October 26, 2019, when the price closed at $9,259.78. By then, the currency pair has been corrected 33% from its high of 13,868.44 USD on June 26, 2019.
After the crossover, the currency bottomed out on December 18, 2019 and rebounded to $6,430, a further 30% drop. From a high of $13,868.44 to a low of $6,430, the total decline was approximately 53%.
In another scenario, the bull market of Bitcoin’s roar reached its highest point of $19,891.99 on December 17, 2017, and the death cross was formed on March 30, 2018, when the currency pair closed at $6,848.01. By that time, the currency pair had pulled back more than 65% from its historical high at that time.
After that, the selling continued and the bottom of the bear market was formed at $3,128.89 on December 15, 2018. This means a further decrease of about 54% from the death cross point and a total decrease of 84% from the historical high.
The above example shows how a death cross occurs in the latter part of a bear market cycle, when investors waiting for the formation of the pattern return a large amount of profits to the market. At the same time, starting a bearish bet may work for short-term traders, but it may be bad for long-term investors.
These examples show that death crossovers are a lagging pattern that forms when most of the decline has already occurred. Normally, if long-term investors find a death cross on the daily chart, they don’t need to panic, but this is a signal that they need to pay more attention and may prepare their portfolio to deal with various unexpected results.
Sometimes death crosses can also be used as reversal signals, so when they are found, traders should look for other signs on the chart to find possible bottoms.
The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, and you should conduct your own research when making a decision.