Just a few
months ago, stock market commentators were worried about a "melt up"
in U.S. equities, with indexes rising faster than earnings fundamentals
justified. The way back down has been just as divorced from any numerical
guideposts, as the Dow Jones Industrial Average has tumbled 37% since mid-February in the mere
anticipation of an impending economic collapse.
That's put
some extra attention on technical analysis, which focuses on using
historical price trends, trading volume, and other statistical indicators
to divine the future direction of a stock or other tradable asset.
One
menacing-sounding technical pattern occurred for the Dow today: the
so-called death cross. It signifies
the index's 50-day moving average—its recent trend—crossed below its 200-day
average, or longer-term trend. Technical analysts note this as the transition
from a short-term selloff to a longer-lasting bear market.
But it doesn't
have a perfect record, Evie Liu noted at barrons.com. Before today, the
Dow has had five death crosses since 2010, while the bull market charged
ahead. And they don't always signify steep losses ahead either.
Evie has the
details:
Since 1950, the Dow was lower only 52% of the
time one month after a death cross, with a median decline of 0.9%. Three months
after a death cross, the index was positive 59% of the time, with a median gain
of 1.8%. The gain was nearly 6% one year after a death cross appeared, while
the Dow ended positive 67% of the time.
None of the death crosses since the 2008-2009
financial crisis led to a bear market, and the Dow bottomed out within 30
trading days every time. The average loss from when the death cross emerged to
the bottom was 5%. And more often than not, the death cross has appeared much
closer to the bottom than to the previous top during a market selloff.
This time
around the death cross certainly came late into the selloff, after 37%
losses for the Dow. Read the rest of Evie's report here.
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