NEW YORK (Reuters) – US equities are expected to face more losses in the near term, according to an indicator with an ominous name: the death cross.
FILE PHOTO: A Trader Views Price Monitors While Working on the New York Stock Exchange (NYSE) in New York (US) on December 4, 2018. REUTERS / Brendan McDermid
A A chart pattern followed by technical analysts and other market participants is a death cross when the short-term moving average of a daily closing index falls below its long-term moving average as both averages decline. Usually, the moving averages of 50 and 200 days are used.
On Friday, the S & P 500 Index .SPX, the US benchmark for large stocks, the main indicator of small business performance, the Russell 2000, reached the death cross.
It happened when the S & P fell another 2.3 percent daily for its third consecutive decline. The 50-day moving average was 3.7 points below its declining 200-day moving average, resulting in the first death cross since January 201
The S & P is now 10.16 percent below its record high of 20 September.  In the past, the death cross displayed a further decline in the index after the pattern appeared.
For example, on November 14, a death cross appeared on the Russell 2000 chart after dropping 13.7 percent from its all-time high on August 31. Since the three weeks it has fallen by another 3.6 percent.
Prior to Friday, the S & P 500 had only been featured on the S & P 500 twelve times since 1928, said Paul Hickey, co-founder of Bespoke Investment Group, Harrison, New York.
After ten of these cases, the index was lower one month later. On average, the S & P 500 dropped 1.9 percent one month after the death cross was formed, with an average monthly slump of 3.1 percent.
Six months later, however, the index is typically higher, with an average gain of 7.5 percent and a median rise of 9.8 percent.
Like all technical indicators, it has its limits, and not all major market sales are signaled in advance by a death cross. The 2007-2009 bear market caused by the financial crisis, which caused the S & P to lose more than half of its value in 17 months, was devoid of a death cross.
Since then, there have been four S & P death crosses.
Some market engineers, such as Brian LaRose of ICAP Technical Analysis of Jersey City, New Jersey, see the Death Cross as a sluggish indicator rather than a leading indicator, which is simply due to accelerating losses in an already established market.
"It does not happen until the market has already collapsed and we've already seen that," said Ken Polcari, managing director at ButcherJoseph Asset Management in New York. "We have a bit of a bumpy price action, but I do not think we'll crash."
Report by April Joyner; Edited by Dan Burns and Nick Zieminski