This article was originally published on ETFTrends.com.
Trade war fears seeped back into the markets as investor optimism surrounding the tariff war ceasefire between U.S. President Donald Trump and Chinese president Xi Jinping faded, causing the S&P 500 to dip below its 200-day moving average while the "death cross," a technical chart pattern term that could signal a major sell-off, looms.
The Dow Jones Industrial Average fell over 700 points on Tuesday while the S&P 500 followed its lead, declining over 2%. As the S&P 500 crossed below its 200-day moving average, the 50-day moving average was in its sight, signaling a possible "death cross"--when a short-term moving average falls below the long-term moving average--a forecast that more pain could be ahead for U.S. equities.
Following October's bout with volatility that spilled over into November following the mid-term elections, the "death cross" is certainly not a welcome sign for investors. However, others are quick to point out that the reliability of the signal is questionable and that it could also present an ideal buying opportunity.
"The problem is that death crosses are quite unreliable signals in the stock market," said Michael Kahn, a Kiplinger contributor, in an article. "Sometimes they do forecast a major selloff ahead. But other times they actually mark good buy signals."
"Historically, death crosses have signaled pending bear markets and continued to keep investors out of the market as prices fell. However, they have not been not so good with corrections," Kahn added.
Kahn, however, did mention that the "death cross" was a reliable indicator prior to the Dot-com bubble in 2000 and the Great Recession in 2008.
Leveraged S&P 500 ETF Traders Thrive on Volatility
While equities investors were rattled by the latest declines, traders in leveraged S&P 500 ETFs thrived on the volatility. Major movers included the Direxion Daily S&P 500 Bull 2X ETF (SPUU) , Direxion Daily S&P500 Bull 3X ETF (SPXL) , Direxion Daily S&P 500 Bear 3X ETF (SPXS) , and the Direxion Daily S&P 500 Bear 1X ETF (SPDN) .
SPUU and SPXL were both marred by the latest declines, losing about 5% and over 8%, respectively. Conversely, SPXS and SPDN gained, 9.20% and 2.52% as of 1:45 p.m. ET.
"While everyone obsesses over the pending death cross in the S&P 500, they seem to have missed the fact that the S&P MidCap 400 Index of mid-capitalization stocks, the Russell 2000 Index of small-cap stocks and the New York Stock Exchange Composite Index all crossed in mid-November," Kahn wrote. "Both the key bank and semiconductor sectors crossed in October. And the overall market is still standing."
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