Another death cross forms, and it's a doozy

Published Wed, Sep 9 20155:01 PM EDTUpdated Sat, Oct 14 201710:44 AM EDT

Don't get too excited about the recent recovery in stocks. The formation of so-called death crosses in major indexes suggests the trend is still lower. The Shanghai composite, the epicenter of the plunge in global markets over the last month, flashed a death cross Wednesday when its shorter-term moving average fell below its longer-term moving average. The index joins the S & P 500 , the Hang Seng and the German DAX as key global averages that formed a death cross in the last month. A bearish technical indicator, a death cross occurs when a security's 50-day moving average falls below its declining 200-day moving average. "Those levels now define the intermediate-time trend. Any rebound you see from this point would be considered corrective rather than a directional move," said John Kosar, director of research at Asbury Research. For investors betting on a year-end rally, an increase in death crosses could be a damper. Kosar defined the intermediate-term as the next one to two quarters, which now overlaps with the fourth quarter. Those last three months of the year are seasonally a strong period for the S & P. There's "a lot of good things happening (in the U.S. economy), but we're also in a global decline that nobody knows (how long it's going to last)," Kosar said. Read More Bank of America cuts S & P 500 year-end forecast Analysts noted the increase in death crosses around the world is the result of greater correlation between global markets in the last year. "What it really shows you is how this has been macro-driven, not fundamentally driven. It's really a worry about the Fed and China," said David Lafferty, chief market strategist at Natixis Global Asset Management. The surprise devaluation of the Chinese yuan last month accelerated concerns of slowing growth in the country spilling over to the rest of the world. In addition, while most major central banks are in easing mode, the U.S. Federal Reserve could raise short-term interest rates for the first time in more than nine years at its meeting next week. For the Hang Seng and Shanghai composite , breaking below a decades-long trendline is likely the more important bearish indicator, according to Chris Kimble of Kimble Charting Solutions. The Hang Seng has remained inside a rising channel for the past 30 years. After forming a death cross, the index is now trading near the lower bound of that channel, Kimble's chart showed. "This is a key line in the sand. It's a bull market above, and you know what it could be on a break below it," Kimble said. The Shanghai composite is also approaching the lower end of its 25-year rising channel, according to Kimble. To be sure, the Shanghai composite and DAX have not yet met the strictest definition of a death cross, in which the slope of the 200-day moving average is negative. For the two indexes, their 50-day moving average fell below an upward-sloping 200-day. Analysts also emphasized the death cross is more a lagging indicator than a predictive one. "The predictive value and bearish implications of the MA crossover is questionable, particularly when the 200-day MA is moving higher in an indication of a bull market," said Katie Stockton, chief technical strategist at BTIG. "Of course, it's reasonable for investors to be concerned because the last two instances of this for the SHCOMP (death cross with 200-day MA trending up) in 2010 and 2011 did precede significant down moves." Read More China poses 'biggest risk' to global businesses Said Stockton, "The increase in death crosses reflects a global correction. Beyond that, I wouldn't read too much into it as a predictive or causal factor."

A Chinese day trader watches a stock ticker at a local brokerage house in Beijing, China.

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Don't get too excited about the recent recovery in stocks. The formation of so-called death crosses in major indexes suggests the trend is still lower.

The Shanghai composite, the epicenter of the plunge in global markets over the last month, flashed a death cross Wednesday when its shorter-term moving average fell below its longer-term moving average. The index joins the S&P 500, the Hang Seng and the German DAX as key global averages that formed a death cross in the last month.

A bearish technical indicator, a death cross occurs when a security's 50-day moving average falls below its declining 200-day moving average.

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