Can the Death Cross Bring Life to This Market?

by: Taxing Wall Street

In the last two weeks, the panic in the market has been enormous causing a huge sell off in all the major indices. There has been significant technical damage plunging through all the key moving averages as well as other reference points of support. The one technical indicator that I keep hearing about is the notorious "death cross" that everyone seems to be so afraid of. However, before you buy into the fear of the death cross alone, I just wanted to point out a chart that might make you change your mind when using this indicator:

Below is a 2 year full chart of the S&P 500 with the 50 day moving average depicted in green and the 200 day moving average depicted in red. For those of you unfamiliar with this technical indicator, a death cross is formed when the 50 day moving average falls below the 200 day moving average.

Chart forS&P 500 INDEX,RTH (^GSPC)

If you look at the far right of the chart, you can see that the 50 day moving average just broke through the 200 day moving average. The consensus on this indicator is that usually the "death cross" will bring about more selling and a significant move lower in the market. However, this can often be a contrarian indicator. I chose the two year chart to show the previous death cross the formed almost exactly 1 year ago. If you look to the first time the green line falls below the red line, it is obvious that this cross actually depicted almost an absolute bottom of the market. Now, if you look at the recent death cross, it is evident that it was formed at the latest bottom in the market.

Granted, there are more headwinds now than there were back then. There are questions about the strength of the consumer, unemployment and housing are still depressed, we have no QE2, economists are worried about a hard fall in china, and the big one, the European sovereign debt and banking crisis. However, if we come close to retesting the "death cross" lows like we did one year ago, I will be buying.

Disclosure: I am currently long PCLN, CMG, AAPL, GOOG, AZO, WYNN, JNJ, CAT, KMP, VZ and MA.

I am currently short RIMM, NFLX, SPY, and PNRA