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The Hindenburg Omen Has Arrived

  
Analysis, Economy, Education, US Market
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Easily the most feared technical pattern in all of chartism (for the bullishly inclined) is the dreaded Hindenburg Omen. Those who know what it is, tend to have an atavistic reaction to its mere mention. Those who do not, can catch up on its implications courtesy of Wikipedia, but in a nutshell: “The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster of May 6th 1937, during which the German zeppelin was destroyed in a sudden conflagration.” Granted, the Hindenburg Omen is not a guarantee of a crash, and the five criteria that must be met for a Hindenburg trigger typically need to reoccur within 36 days for reconfirmation. Yet the statistics are startling: “Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.” The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches – something big is coming.

As a reminder, the 5 criteria of the Omen are as follows:

  1. That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
  2. That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
  3. That the NYSE 10 Week moving average is rising.
  4. That the McClellan Oscillator is negative on that same day.
  5. That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

Today, all five conditions were satisfied. June 2008 was another such reconfirmed event, and as Barron’s pointed out then, “there’s a 25% probability of a full-blown stock-market crash in the next 120 days. Caveat emptor.” Boy was the emptor caveating within 120 days (especially if said emptor was named Dick Fuld). Which brings us to the present: should the Omen be reconfirmed within 36 days, all bets are off.

Some behaviors that virtually guarantee losses in the markets

  
  Education
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• Lack of discipline: It takes an accumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others. They just want to believe, like Fox Mulder.

• Impatience: Some have an insatiable need for action. The day trading adrenaline rush and the gamblers’ high can have heroin-like addiction pull.

• No objectivity: Some are unable to disengage emotionally from the market. They create a virtual “lifelong” marriage to their trades. Divorce is not an option.

• Greed: A desire for quick profit blinds many from the diligent work needed to actually win in the long run.

• Refusal to accept truth: Some do not want to believe that the only knowable truth is price action. They feel more secure following cult leaders serving Kool-Aid.

• Impulsive behavior: Many jump into investments based on the morning paper or Good Morning America. Thinking that if you act quickly, somehow you will beat everybody else in the great race is a recipe for a messy failure.

• Inability to stay in the moment of now: To be a successful trader, you cannot spend your time thinking about how you are going to spend your profits. Trading because you have to have money is not workable.

• Stay open-minded: Come into the day knowing your future steps. Do not be stubborn when the market does not go your way. Cut your losses and follow your stinking trading plan.

• Avoid false parallels: Just because the market behaved one way in 1995, 2000, or 2008 does not mean a similar pattern today will give you the same result. A great example of this: The Hindenburg Omen. It is a technical analysis pattern that is said to portend a stock market crash. The problem: Sometimes it is right, sometimes not. You don’t want to bet your life savings on a coin flip.

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