E Using The Double-Death Cross For Improved Sell Signals

All traders are aware of the Death-Cross (when the 50-day moving average falls below the 200-day moving average) as a sell signal. Anyone who has been an active trader since 2008 also knows this frequently provides false signals and has ceased to be useful for its intended purpose. It is not unknown for something like this to happen with indicators. When it does, some modification of the old signal is needed or it has to be abandoned altogether.

There is a simple modification that can be done for the Death-Cross, which can be called the Double-Death Cross. This is based on the idea that if two moving averages don’t work, then an obvious solution is to try three, with the third one acting as confirmation that the signal given by the first two is valid. But what should the third one be? It turns out that the 325-day (or 65-week) moving average is an excellent option. While this may seem like an odd choice, it isn’t. Traditionally, commodity traders used the 65-week as the dividing point between a bull and bear market. It turns out it works quite well for stocks too.

So when the 50-day falls below the 200-day (or the 10-week below the 40-week) moving average, wait until there is a further cross of the 325-day (65-week) until you decide it’s a good time to take short positions. In strong bull markets, the distance between the 200-day and 325-day can be considerable, so the confirming cross is unlikely. After the bull market has been waning for a while and stock prices have been moving sideways, these two moving averages will start to move closer and the 50-day cross of the 325-day becomes more likely.

An example of when the 50-day/325-day cross failed to take place recently took place on the Nasdaq in the United States and the Nikkei in Japan. The red lines point to where the 50-day failed to confirm the 200-day cross by not falling below the 325-day and the market then headed back up and when the signal was finally confirmed later on.

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Bill Johnson 4 years ago Member's comment

Great read, thanks.

Daryl Montgomery 4 years ago Author's comment

Thanks! There will be followup articles explaining more.