Understanding Golden cross, Death cross and their significance

For a long-term bearish or bullish outlook on a stock, often golden cross and death cross charts provide a meaningful view. Typically, when the short-term moving average crosses over the long-term moving average, a long-term trend of either nature is confirmed.

While the former confirms a long-term bull trend, the latter hints that the bearish market trend is in the offing for a longer term.

So what are the golden cross and the death cross?

Golden cross is a bullish breakout established through the crossover in which the security’s short-term moving average, such as the 5-day moving average or 50-DMA, breaches its long-term moving average, such as the 200-day moving average/200-DMA or the resistance level.

Importantly, as long-term measures carry more weight, the formation of a golden cross suggests the possibility of a long-term bull market. Further, this trend is strengthened by higher volumes.

The death cross is a chart pattern wherein the short-term moving average of a security falls below the long-term moving average. The short-term moving average implies the average of recent closing prices for a stock, index, or commodity over a set period of time. Though referred to as the ‘death cross’, it is not the market moment that needs to be feared in real terms. 

So, despite being indicators of the opposite nature, the indication becomes all the more relevant when the security’s volume also soars in such a situation.

Moreover, in case of the golden cross, the long-term moving average is deemed the support, while it is taken as the resistance in case of a death crossover.