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NASDAQ just hit the Death Cross, this is what could happen based on history

If you have not realized, the tech heavy NASDAQ composite index just hit the death cross. The death cross is a technical chart pattern indicating the potential for a major sell-off. The death cross happens when a stock’s short-term moving average typically its 50-day moving average crosses below its long-term moving average, typically 200-day moving average. So what is so frightening about the death cross.

Since 2000, NASDAQ has hit the death cross for a total of 12 times.

Most notably in 2000, death cross was observed in Jun 2000 and what followed was the dot com bubble burst where the index fell more than 50% from that point.

In Feb 2002, death cross formed again after a short recovery amidst the dot com crash and the index continued to decline another 30%.

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In Jul 2004, after the death cross crystallized, the index fell 12% before recovering.
In May 2005 and Jun 2006, the death cross was formed momentarily and recovered promptly.

The next major death cross happened in Jan 2008, which is the beginning of the Great Recession stock market crash. The NASDAQ composite fell more than 40% before recovering.

Subsequently in Jul 2010,  Aug 2011, Sep 2015 and Jan 2016's death crosses, the index did not drop much further but instead whipsawed for a while before continuing its uptrend.

Then came the death cross in Nov 2018, the index dropped 15% before recovering.

In Apr 2020, the death cross did not result in further drop but instead the market had a V-shaped recovery due to the quantitative easing to cushion the impact of COVID-19.

Here we are now in Feb 2022 with the death cross just crystallized again for the NASDAQ composite index. Since 2000, there have been a total of 12 death crosses and 5 ended with major sell-offs. 6 with the index whipsawed and the most recent one with a V shape recovery. Hence the probability of further sell off is around 40%. Will you want to take the chance to buy the dip now? Based on the above observation it would be prudent to wait a while before buying in no matter how undervalue it may seem.

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