US stocks showed a “death cross”! But could the market usher in a V-shaped reversal this time?

The Zhitong Finance App learned that at a time when the US stock market is being sold off due to tariff issues, the emergence of a “death cross” technology pattern has once again raised market concerns. However, historical data shows that this appalling technical signal does not necessarily mean that the stock market will face a sharper decline.

A so-called “death cross” is formed when the 50-day moving average, which is regarded by technical analysts as a medium-term trend indicator, crosses the 200-day moving average, which reflects a long-term trend. Technicians believe that this phenomenon indicates that a short-term adjustment may evolve into a long-term downward trend.

As of Monday's close, the 50-day SMA of the S&P 500 index was around 5,748 points, while the 200-day EMA was at 5,754 points. Although the benchmark index closed up 0.8% on the same day, this marks the first time since February 1, 2023 that the mid-term trend indicator has fallen below the long-term trend line.

Previously, the Nasdaq Composite Index had a “death cross” on Wednesday.

Adam Turnquist, chief technical strategist at LPL Financial, said, “This signal sounds very ominous in the stock market, but when you actually go back to historical death crosses, choosing to buy at this point is more beneficial than selling.”

Going back about 50 years of data, the S&P 500 index had a total of 24 death crosses. Data analysis shows that in 54% of cases, this signal appeared after the biggest intraday decline in the index, which means that the worst decline occurred before the death cross formed.

In another 46% of cases, the sell-off continued to worsen, and the benchmark index fell by an average of 19% from the point of death.

This signal did trigger a sharp decline. After death crosses in 1981, 2000, and 2007, the market eventually declined by 21%, 45%, and 55%, respectively.

After studying nearly 100 years of data, Bank of America technical strategist Paul Ciana pointed out that the S&P 500 index has a 52% chance of falling within 20 days of death crossing, with an average drop of 0.5%. However, he added in Monday's report that 30 days after the signal appeared, the index had a 60% chance of rising, with an average increase of 0.8%.

Analysts said that the market has already experienced a significant degree of sell-off — the S&P 500 almost confirmed a 20% technical bear market this month — while several bearish indicators, including the CBOE Volatility Index, hit high levels. These signs suggest that the peak of the sell-off may be over.

“We have observed significant capitulation signals in the overall market over the past week,” Turnquist said. “Judging from the chart pattern, I think the current V-shaped recovery is more likely than in 2018 or 2020, rather than a prolonged decline.”