June 16, 2015

Significance of Death cross and Golden cross

A Death cross is said to form when the 50 DMA crosses the 200 DMA from ABOVE. This is supposed to signify extreme bearishness. The reverse is when the 50 DMA crosses the 200 DMA from BELOW. This is called the Golden cross and is supposed to be a bullish sign.

My personal take on this: ignore this as it has no practical significance. It is however excellent for creating content (fillers) for the blue TV channels (and blogs like this) and for analysts to appear intelligent (me included).




Explanation: like almost all indicators, this works only half the time. To make matters worse, the crossover happens when the key indices have already moved 10-15%. Obviously it is useless in rangebound markets and excellent in trending markets. However, the signals come too late to have any trading utility.

Example charts: I am using line charts for NF from 1995. The moving averages are blue (50 DMA) and red (200 DMA)  while the NF chart is light grey for ease of viewing.

The first chart 1994-2000 has a lot of whipsaws.


The period 2001-2008 has been a very strongly trending bull market


The period 2008-2013 has produced mixed results with  two small whipsaws.


This is a blowup chart... as can be seen the signal has come AFTER the markets have already lost 10%!


And this is the latest chart as of 16-JUN-2015... death cross has come after NF has lost more than 10%.


12 comments:

  1. Great!! KP Boss. Perhaps correction would continue for several weeks. Going by the turtle trading system too - 55 days low of 5588 was broken today indicating a down slide for couple of days or weeks. Am I correct? - at least theoretically.

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    Replies
    1. The 55 day turtle indicator should have given a sell late FEB which would have been whipsawed. The buy thereafter also got whipsawed. This is because the market is rangebound so consider any indicator signal in light of this.

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    2. ALso note that sell signals which appear near major supports tend to fail (and vice versa).

      This is NOT a rule but something which one should be alert for and not get surprised if it happens.

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  2. sir then what we do next
    as per u i sell @ 5980
    i cover @ 5680

    today i buy @ 5630
    exit @ 5600

    i am a big fan of u...
    plz suges me nxt what i do..

    ReplyDelete
    Replies
    1. Ideally you should have been short today on break of 5600... now it is better not to do anything as shorts will start booking profits.

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  3. hi sir i am big fan of u..
    i sell nifty whn its break 5days low @ 5934
    i cover @5680

    today i buy @ 5630
    exit 5600

    now wht i do ots better shot again...
    plz sugs...as soon as possible.

    ReplyDelete
  4. Thank you KPL-ji..it's very true . Your excellent mind set up and accepting the facts about technical indicators are amazing. Mostly analysists will not accept the failures of indicators are methods (ex - 50/200 sma) now there is a talk if at all any upside bounce comes also which will not sustain and market will correct atleast 20%. ofcourse i am staying away from much noises as i am a CAM/FIBO and EMA combo trader and a short term positional trader. (just for weekly/monthly) Yesterday apart from the trendline support u hv warned about 5600 breaking too :)

    thanks a ton for your continuous updation it's all lesson for me regarding indicators/charts etc.,

    tks nd regards


    ReplyDelete
    Replies
    1. Thanks/ welcome.

      I appreciate your regular comments/ feedback.

      Delete
  5. excellent ! excellent !! excellent !!!

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  6. SIR
    Thank You.
    Your views on Death cross is an Eye opener.
    Ravi

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  7. Good one KPL. The skull and bones says it all.

    ReplyDelete