The Dow Jones’ Death Cross: Here’s Why I Love It

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The death cross. It’s a phrase that sounds more medieval war weapon than it does stock chart technical signal.

You may have run across a death cross somewhere on the Internet over the last few months, as those two grim words have been on many investors’ minds lately; and on Tuesday, it finally happened:

The Dow Jones Industrial Average 50-day moving average crossed below the 200-day moving average.

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Traders and technicians who use charts to make quick buy and sell decisions believe a death cross is the point where an equity or index’s selloff morphs from a snowball into a proverbial boulder.

In other words, hold on to your hats, boys and girls!

The Death Cross Cometh

The very fact that this is occurring tells us that there is more than a dollop of angst in the current market environment.

You can see the action circled in the chart above.

As many of you already know, I’m mostly a fundamental investor, but there certainly are valid uses for stock charts. Technical analysis isn’t voodoo or superstition (there are no black cats crossing paths here, just MAs). And if you step on the crack, don’t worry, you aren’t going to break your mother’s back.

What chart reading is good for is measuring the resolve or fear of investors. But just like everything else in the stock market, technical analysis is not guaranteed. It just doesn’t work that way.

Back in January 2008, the death cross ushered in a selloff that lasted 14 months. When the dust finally settled, the Dow Jones was down a whopping 50%. But since then, death crosses have actually been “buy” signals pointing to the ensuing climactic selloffs as a cleansing of the weaker hands. Think back to the July 2010 death cross … that was a time to back up the truck, not run for the hills.

In the end, much like Mary, there is something about death cross signals. They underscore current weaknesses and vulnerabilities. But with that said, I actually would have liked to see more fear and downside volume. Why? That’s when the best opportunities present themselves.

We are currently in the midst of the perfect test of investor resolve, especially with Wednesday’s 276-point intraday reversal in the Dow Jones Industrial Average. The chart still points to a downside bias, but it’s now near a key resistance level that could finally get the ball rolling in the other direction.

Investors will be tested as there could be more pain as we finish the summer and head into September and October. The key now, is not to let emotions get the best of you and to assess whether the long-term investment thesis is still in place. I see the market making a major move higher into the New Year. Valuations are low and some of the biggest losers in tech and media will be among the leaders from oversold positions.

In the here and now, though, there has been no reason to force the issue in terms of buying. But with the long-term view in mind, I love market pullbacks for the chance to buy great companies at a bargain.

Curious what Wall Street insider Charles Payne really thinks? Get more behind-the-scenes insights, valuable market research and hands-on guidance including live stock recommendations from Fox Business’s rising star. Charles Payne’s Smart Talk is absolutely FREE for a limited-time only. Sign up today!

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