Yesterday, the NYSE ( in addition to several other indicators) gave us a Hindenburg Omen signal. “What the heck is that?”, you may be asking. Basically, it is a sign of an unhealthy market. Typically, up markets will have a greater (but not extreme) number of new 52 week highs vs 52 week lows. A down market typically will have a greater (but not extreme) number of 52 week lows vs. 52 week highs.
In contrast, when we get both a large number of new 52 week highs and simultaneously a large number of new 52 week lows, this exhibits a very unhealthy divergence in the market. When combined with several other factors, it creates what is called the Hindenburg Omen (named after the zeppelin that went down in a fiery crash in 1937). I think you get the picture.
This Omen still needs to be confirmed within the next 30 days by another Omen before it is considered a full blown confirmed Hindenburg Omen signal. At this point, we are just on alert.
“Why should I take notice when we have a confirmed Hindenburg Omen signal?”, you may ask. Well, once an Omen has been confirmed, there is a 77% (based on historical data – past performance is no guarantee of future results) probability of a down move greater than 5%, usually within 45 days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%.
There have been Omens that did not produce a crash but there has not been a market crash since 1985 that was not first preceded by the Hindenburg Omen. The last Omen we had was in 2008 when the Dow was above 14,000. The day after the Omen signal was confirmed, the market immediately began its crash down to the March 2009 lows. It can happen that fast though the signal can last for several months out.
Back in April of this year, the MTPredictor Elliott wave and Fibonacci trading software for stocks, commodities, futures and forex, printed an automatic short Decision Point signal which has held as the recent market high and has not been exceeded. This may have been an early warning sign that the market was beginning to turn to the downside. We’ll see.
The bottom line, if we get a confirmed omen, is to protect those assets you hold that are geared to make money only when the market rises. These may be such things as stocks and mutual funds in IRA’s or 401K, 403B and pension funds.
There are also opportunities to profit from these potential down moves but as always manage your risk!
To Your Trading Success,
JM
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