‘Death cross’ formation hints at more short-term pain for Nifty

The ‘Death Cross’, unlike most other chart patterns, is rather easy to read. But as its name suggests, the readings often point to the beginning of a bearish run — something Indian equities might have to endure in the event of a 2008 re-run globally. However, analysts don’t expect the bear hug to last long in India, despite the ‘Death Cross.’

In the ‘Death Cross’, short-term moving averages (typically, 50-day moving average) of a stock or index cross below its long-term moving averages (usually 200-day moving average), and such a pattern generally points to further weakness for the stock or index. Nifty’s current 50 and 200 DMAs stood at 11,186 and 11,224, respectively. The Nifty has dropped nearly 10 per cent from the recent high in June, and this has resulted in a bearish pattern on the index.

On past eight occasions of ‘Death Cross’ formation, average returns of the Nifty in 10 to 240 sessions after the crossover have ranged from 1.1 per cent (for 10 sessions) to 13 per cent (for 240 sessions). Of course, 2008 was the stand-out exception when the global financial system witnessed its biggest crisis since the Great Depression, causing a protracted bear run in Indian equities.