Technical analysts are warning about impending “death crosses” in the major stock averages, even though this bearish signal gave a false alarm last summer when it actually marked the bottom in equity exchange traded funds for 2010.
“A death cross is nearing on the S&P 500, a sell signal where the 50-day exponential moving average dives through the 200-day exponential moving average. In the last five years there have only been three occurrences on the S&P 500,” said Tarquin Coe at Investors Intelligence.
“There was one in January 2008 and that proved reliable as the index went onto lose over 50%,” he added. “There were two consecutive death-crosses last summer, one in July and then another in August. Both of those signals failed as did a head-and-shoulders top at the time. It was a bull market so bearish patterns/signals were doomed to fail.”
As last summer demonstrated, the bearish technical indicator has a mixed track record. However, the death cross in financial ETFs earlier this year presaged the sell-off in bank stocks. [Bank of America Caught in Downtrend; Financial ETF Sees ‘Death Cross’]
Also, the recent stock sell-off arrived after the S&P 500 and ETFs tracking the index formed a large “head and shoulders” topping pattern. [Bear Trap or Top in S&P 500 ETFs?]
“Further ‘bear market’ evidence would be on the table should the imminent death-cross prove successful in the weeks ahead,” Coe wrote in a newsletter Friday, adding the signal should print early next week.
The technical analyst also pointed out a bearish cross in an industrial sector ETF.
“Industrial Select Sector SPDR Fund (NYSEArca: XLI) has been leading to the downside since the start of this rout. The relative chart against the S&P 500 has fallen off a cliff since early July,” he said. “This sector has just printed its death-cross. The first since June 2008, a sell signal which proved genuine.” [Leadership Shift in Sector ETFs]
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.