Investtech Research: Death Cross, statistical results

Published 2 November 2022
Written by senior researcher Asbjørn Taugbøl, head of R&D Geir Linløkken and senior researcher Fredrik Tyvand.

Abstract:
Moving average is one of the oldest and most used indicators in technical analysis. A common strategy is watching when the 50-day moving average crosses below the 200-day moving average. This is called a Death Cross and is said to signal falling prices. We have identified Death Cross signals in the Nordic markets in the period 2008 - 2020 and studied price development following these signals. This work was supported by the Norwegian Research Council.

Sell signals from moving average

With support from the Norwegian Research Council, we have conducted a study into price development following signals from the moving average indicator. Usually a 50-day moving average and a 200-day moving average are defined and signals triggered when these cross. In this study we have looked at what happens following so called Death Cross signals, where the short term average crosses below the long term average. The data are every listed stock in the Nordic countries in the period 1 January 2008 to 31 December 2020. This is a period of 13 years with both long uptrends, downtrends and sideways movements. In the statistical results, we have studied price development in the 3 months (66 days) following the signals. The results were compared to market development in the same period after the signals in order to calculate excess return.

About the analyses

We used the 50-day moving average as short term indicator and the 200-day moving average as long term indicator. A sell signal was identified when the short term average crossed below the long term average.

Death Cross: Short term average crossing below long term average shows that the price in a given shorter time period has fallen more than in a given longer time period.

Analysis results for Death Cross

Analyses were conducted to identify signals and calculate absolute and relative return for these. 4452 Death Cross sell signals were identified. This is a good basis for statistical analyses.

Average return for the sell signals is shown in the chart below.

Figure 1: Average return following Death Cross sell signals, i.e. where 50-day short term moving average crossed below the 200-day long term moving average. Red line is signal stocks, black line is benchmark. Shaded red area indicates standard deviation of signal stocks. The Nordic markets 2008-2020.

pp = percentage point, i.e. the arithmetic difference of the percentage returns.

For the Nordic markets combined, we see that stocks with sell signals did not develop any weaker than benchmark. The market on average rose during the signal period, so the signals did not indicate future weak market development either. Consequently, the sell signals had no predictive power. This indicates that this kind of sell signal should not be part of a trading strategy.

Conclusion

Death Cross signals (50-day moving average crossing below 200-day moving average) had low signal value. Such signals are not suited for use in a trading strategy.

Please find results for buy signals from moving average and more details in the research report here (in Norwegian, Professional subscription required).

Literature

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Keywords: Forskningsresultater,Glidende snitt,Kjøpssignal,Salgssignal.