Stock Market Crash Death Cross Doom Prevails
Stock-Markets / Stock Markets 2016 May 23, 2016 - 06:22 PM GMTBy: Nadeem_Walayat
We appear to be at one of those stock market times of the year when cognitive dissonance prevails, for one does not need to look far to see the building mood for imminent doom that apparently has been imminent all year! Nevertheless, it appears to be reaching a new fever pitch of intensity with the focus now on the apocalyptic sounding DEATH CROSS ! Which depending on the analyst has occurred from twice to more than a dozen times this century for the fundamental fact that the Death Cross just like much of Technical Analysis is just a back fitting exercise, i.e. tweak the parameters used so as to fit a pattern with the benefit of hindsight so as to support ones pre-existing opinion.
So exactly what is the death cross ?
The consensus view is that a death cross is when the 50 day moving average crosses below the 200 day moving average, though as I said earlier doom merchants tend to play around with the values i.e. 50 day vs 100 day or 25 day vs 100 day etc... Or if they can't make it fit on a daily chart then jump to weekly, fortnightly even monthly charts. And if that does not work than change the indices, from Dow, to S&P to Nasdaq before wondering off around the world looking for that stock market index that fits the pattern sought, whatever fits what has already happened and confirms the commentators perma-doom opinion.
Where are we in terms of the consensus parameters of 50 day vs 200 day?
Firstly, currently there IS NO DEATH CROSS, instead the last signal was a BUY SIGNAL
Secondly the last death cross of January 2016 was a FAIL, i.e. by the time of the cross the Dow had already fallen and bottomed literally within days, so ALL those who acted on the January death cross signal would have been wiped out by the subsequent rally.
Thirdly, the August 2015 death cross could have proved profitable IF those who acted on it exited within a couple of weeks or so. But the problem is that the highly vocal advocates of the death cross tend to see it in terms of the start of NEW BEAR MARKETs or worse rather than a short-term technical trading tool.
The bottom line is that a coin flip is a MORE reliable than the death cross. Which highlights the point I often make that each technical tool such as death cross's and elliot wave theory on their own are little more than 50/50 propositions which therefore means one should be skeptical of ones own analysis else one falls into the same trap that the death cross merchants have today, who believe they have found the holy grail but in reality are just fooling themselves, to suffer from cognitive dissonance when the stock market actually does the opposite of what they expected it to do, whilst at the same time they cling on their death crosses in perpetuity.
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By Nadeem Walayat
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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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