NEW YORK (TheStreet) -- One of the scariest words being thrown about during the stock-market selloff is the so-called "death cross."

Though it sounds like a heavy metal rock band or horror movie, it actually can help investors figure out where a stock or market index is moving next.

In simple terms, a death cross is when the short-term price trend -- or moving average -- in a stock or index moves below the longer-term trend. That creates an X shape, or death cross, on a chart. Usually, it's a sign that the stock is headed for more losses and may take several months to reach a new high.

That helps investors figure out whether the stock has hit a bottom and could be a buy, or is still headed lower and thus might be worth selling.

Among those entering the death cross recently are well-known names such as Apple (AAPL) - Get Apple Inc. (AAPL) Report and the Standard & Poor's 500 Index.

As the flash crash was occurring on Aug. 24, Apple's stock was signaling that a death cross was imminent. The daily chart shows this formation with the 50-day simple moving average of $120.52 below the 200-day simple moving average of $121.59.

That is an indication that investors should reduce positions in Apple by selling on strength. It is not a signal to short the stock.


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Here's how to trade Apple given the death cross and key technical levels.

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Investors looking to buy Apple should place a good-till-canceled limit order to buy the stock if it drops to $90.44, which is a key level on technical charts until the end of 2015.

Investors who are more aggressive can consider limit orders to buy at $110.43 and $109.68, which are key levels until the end of the year and for this week, respectively.

Investors looking to reduce holdings should place a good-until-canceled limit order to sell the stock if it rises to the 50-day simple moving average, which is at $120.52 and is declining day to day.

The S&P 500 index begins this week confirming a death cross with the 50-day simple moving average of 2,071.8 falling below its 200-day simple moving average of 2,075.1. That confirms the all-time intraday high of 2,134.72 set on May 20 as at least a multi-month high.


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Earlier this year,  the Dow Jones Transportation Average entered the death cross.

The daily chart for Dow Transports shows that the index set its all-time intraday high of 9,310.33 on Nov. 28. As the index moved sideways to down, the 50-day simple moving average in blue declined below the 200-day simple moving average in green on May 26. From this high to the flash-crash low of 7,452.70 set on Aug. 24, the transportation average fell 20%. Friday's close of 7,908.66 has the average down 13.5% year to date, firmly in correction territory.


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The daily chart for the Dow Jones Industrial Average followed with a death cross confirmed on Aug. 11 which provided a warning several days before the Aug. 24 flash crash. On Monday, the 50-day simple moving average is 17,501, which is below the 200-day simple moving average of 17,780.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.