Chart: Beware the Death Cross fairy tale

Scott Mlyn | CNBC

Hans Christian Andersen wrote cautionary fairy tales, some of which, like "Little Red Riding Hood", are used to frighten small children.

Some commentators latch onto market fairy tales and use them to frighten ill-informed investors. The Death Cross is part of this evil fairy tale vocabulary.

The Death Cross sounds suitably terrifying and ominous, but its signals are not reliable and the market is riddled with false Death Cross signals where the index has rebounded and continued the uptrend. The Hang Seng showed false Death Cross signals in 2014, 2013, 2012 and 2010. In the Dow, the signals are false in around 60 percent of recent occurrences.

Anybody who actually uses the Death Cross and its benign cousin, the Golden Cross, to make investment decisions can lose substantial money. Of course for the ill-informed those losses just prove that technical analysis doesn't work so they deride more sophisticated applications of technical analysis as akin to reading the tea leaves.

The Death Cross refers to when the 50 day moving average crosses below the 200 day moving average. The Golden Cross is when the 50 day moving average moves above the 200 day moving average. The Death Cross is like the funeral notice when the death occurred weeks before.

These crosses are guaranteed to do two things. First, to get you into an uptrend change too late, surrendering a large chunk of potential profits. Second to get you out of a rising trend too late, surrendering large achieved profits. How large? Surrendered profits are generally in the order of 14 percent but can be as high as 20 percent. Surrendered potential profits from a delayed entry into the new uptrend are of a similar magnitude.

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Death Cross and Golden Cross-based investing decisions are favored by those who apply fundamental analysis to the market. It's sometimes about as sophisticated as their technical analysis gets. It may explain why the vast majority of investment and managed funds are unable to match the performance of the underlying index. If you remove about 20 percent from any long-term uptrend move then your returns are immediately severely limited.

The Death Cross on the Dow was preceded in the past few weeks with a rounding top pattern. Unlike the Death Cross, the rounding top pattern is also used to set the probable downside targets for the market fall.

My blogs for CNBC apply robust technical analysis methods. Reading these tea leaves delivers price targets that are achieved around 88 percent of the time, as shown with oil hitting our recent downside target of $38. In 88 percent of blogs I wrote in 2014, the price targets were achieved or exceeded. That's around the same percentage of correct calls in 2013 and 2012 and I'm on track for the same results in 2015. But you wont get any simplistic, scary, fairy-tale Death Crosses from me.

Daryl Guppy is a trader and author of Trend Trading: The 36 Strategies of the Chinese for Financial Traders, available at He is a regular guest on CNBC Asia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.