Despite Ethereum (ETH) experiencing a more than 3.5% increase in value last week, it is currently on track to form what is known as a "death cross."
A death cross happens when Ethereum's 50-day simple moving average is projected to dip below its 200-day moving average. It's worth noting that the last time this occurred was in late January 2022.
Traditionally, a death cross is seen as a long-term bearish indicator, suggesting that the short-term trend is underperforming in comparison to the long-term direction. However, historical data tells a more nuanced story.
Ethereum has experienced six death crosses since its inception, but only three of them actually resulted in the expected bearish outcomes. The other three instances went against the trend, catching traders by surprise.
For instance, after the confirmation of death crosses on April 11, 2018, August 2, 2021, and January 28, 2022, Ethereum suffered double-digit losses over the following 12 months. In these cases, holding a short position during this period would have led to significant returns.
Conversely, traders who held a short position for 12 months following the first, third, and fourth death crosses missed out on substantial price rallies. In many instances, these death crosses ended up being contrary indicators. Within three to six months of a death cross occurring, prices often rebounded, and the moving averages aligned to produce what is known as a "golden cross."
In summary, the death cross is not a reliable standalone indicator. However, it's essential to consider it in the broader context of market sentiment. Currently, the impending death cross aligns with the bearish outlook in the Ethereum options market and concerns about a slowdown in Ethereum's network usage.
Source: FXStreet