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Hindenburg Omen thread

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How to Trade: The Hindenburg Omen Stock Market Crash

 

001pzp.jpg

 

Should investors be keeping their finger on the panic button as a result of a technical indicator that many investors may have not even known about just a few days ago?

 

One of the main criteria for the Hindenburg Omen to be triggered is a negative reading in the McClellan Oscillator. The McClellan Oscillator is a technical indicator that relates to the market breadth, or what is known as the daily advance-decline line, tracking the difference between the number of stocks moving both higher and lower. As long as the McClellan Oscillator is positive, there is no Hindenburg Omen.

 

TheStreet recently caught up with Tom McClellan, editor of the McClellan Market Report, and Son of the McClellan Oscillator -- Tom's father Sherman McClellan invented the Oscillator. McClellan said investors might want to take a step back -- and take a more comprehensive view of the market outlook -- before betting all, or selling all, on the Hindenburg Omen.

 

TheStreet:There's been a healthy level of debate about the Hindenburg Omen, with some blogs quoting figures that it's only proven to be successful 25% of the time. Why should investors pay attention to the Hindenburg Omen at all?

 

McClellan: My response to the criticism that the Hindenburg Omen has only worked 25% of the time is to ask, What's the track record of a railroad crossing? Plenty of times a railroad crossing signal is triggered but there is no train. When one of these warnings is signaled, an investor needs to remember that it's simply telling you conditions exist for something to happen, but it doesn't necessary mean it will happen. It's nice to know, more or less.

 

zzzpj.jpg

 

The tendency of people to turn something like this into a trading system is not a proper usage. It's a warning sign and an investor should never use one piece of information. Take 2007, for example. When you look at the charts along the way up towards the final high in 2007, there were lots of these warnings signs. [There were at least 7 Hindenburg Omen signals on the way up towards the last market crash, according to McClellan data]. Any one of these warnings signs all by itself could arguably be dismissed.

 

TheStreet: Therefore, the Hindenburg Omen can be dismissed?

 

McClellan: The Hindenburg Omen has a 30-year history, and the fact of the matter is that we don't get a bear market without one of these signals. You don't get a bear market all the time, but you never see a bear market come as a complete surprise with this signal.

 

/more: http://www.thestreet.com/story/10837097/1/...cm_ven=GOOGLEFI

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It seems to me that Silver Sammy is much more accurate than any Hindenburg Omen.

Okay.

I think the accuracy of the "Omen" improves dramatically, if you put it together with a "Grace Box" / see thread

 

Mr present reading is that a big drop has been signalled, but the market will rally to about 1107

before the impulse wave down begins. Maybe that rally will be done by Friday.

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Hindenberg Omen Meme On Fire

 

http://yelnick.typepad.com/yelnick/2010/08...me-on-fire.html

 

One of the scariest technical indicators is the Hindenburg Omen: it predicts a crash, or at least a serious drop. It happens when the market skews with high numbers of both new lows and new highs. Under Fractal Finance principles, it reflects a high degree of chaos - distribution from one position to another - right before the market finds its new direction.

 

You can read the requirements here, but suffice to say that when it occurs we also see a flurry of bearish blog posts. As now.

 

It takes two observations to make the Omen. While the Omen goes back to the '70s, the classic treatment on it came from Robert McHugh back in 2005, who added two more tests, including having two confirmed Hindenburg sitings within 36 days, which confirms the Omen.

 

The Double Omen has occurred before every stock market crash, but not every Double Omen is followed by a crash. A warning, not a prediction. But one with high odds: over 75% predictive.

 

We just confirmed a Double Omen:

 

The Double Omen preceded the 1987 crash, the 1989 mini-crash, the 1998 crash, the 2000 top, the drop before 9/11, and the plunge into the 2002 low. The last Double Omen was in June 2008 (crash!).

 

A "crash" can be mild (>5%) to severe (>15%). The crash occurs within four months, with over half within 41 days. Odds are 77% will result in at least a mild crash (>5%). The odds from the previous 27 confirmed double Omens are:

 

30% chance of >15% drop

25% chance of >8%

22% chance of >5%

15% chance of a mild decline (>2%)

7.5% chance of failure (<2% decline)

The methodological debate right now is whether the low volume and high degree of program trading 'bots have caused a false signal. Maybe the Flash Crash was also a consequence of high-frequency-trading and the anomalous behavior of these 'bots. Or maybe take warning: we have a high fractal correlation with the 2008 drop right now.

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Max and Stacey talk Hindenberg Omens - about 12 minutes in:

 

http://podcast.gcnlive.com/podcast/truthAb...kets/081410.mp3

 

Podcast site :

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IN THE LAND OF THE SIGHTED technical analysts, the blind man rules !

 

James Miekke is a brilliant technical analyst, who helped to refine the McClellan Summation index, and is "the world authority on the Hindenberg Omen."

He is a former physics teacher who lost his sight, and had only $30,000 in savings, which he has managed to turn into a substantial fortune through his own trading efforts, and using signals that he has pioneered.

 

A very informative interview was done with him by David White on TFNN.com this past week. If you are interested in the H-Omen, it is a "must listen."

 

theomen.jpg

Temporary Link to DW's Podcast :: http://globaledge1.podomatic.com/entry/201...T21_49_23-07_00

 

Link: http://TFNN.com

(Get a sign-on and password, and go to Radio Archives: The Power Trading Hour

Host David White : PTH081810 )

 

Mieke says that one Omen signal uses is good for a drop, and two could be good for a crash.

 

He also wants to see the Summation index "go below zero". (That could occur by early September, he thinks.)

The McClennan Oscillator and Summation Index ... update / ...is breaking down

mc1t.png

mc2.png

mc3.png

mc4g.png

compare Nasdaq version - middle section : update

nasmc5.png

 

McClellan Summation Index

The McClellan Summation Index is a popular market breadth indicator that is ultimately derived from the number of advancing and declining stocks in a given market. It is derived from the McClellan Oscillator by tracking its daily accumulation or "summation". This provides a longer-term view of the McClellan concept. Many people regard it as an excellent indicator of the overall "health" of the market and the market's current trend. It was developed by Sherman and Marian McClellan and first presented in their book, Patterns for Profit (available from McClellan Financial Publications).

 

Calculation

There are two methods for calculating the Summation Index. The first method (the one originally used by the McClellans) simply maintains a running total of the values of the McClellan Oscillator (which is defined here). The second method uses the following formula:

 

Summation Index = 1000 + (10%Trend - 5%Trend) - [(10 x 10%Trend) + (20 x 5%Trend)]

where:

5%Trend = 39-day EMA of (Advancers-Decliners)

10%Trend = 19-day EMA of (Advancers-Decliners)

 

Miekke also likes the Presidential Cycle, and thinks that a great buying opportunity in Tech stocks may come by late October, or so. Perhaps after a Hindeberg-related crash.

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... now Karl Denninger is backing up Miekke ...

 

Shields Up! Hindenburg Approaches

 

So yesterday, depending on exactly who's numbers you use, we got either a confirmed Hindenburg observation or a "rounded" one.

 

When I checked it earlier in the evening, it was clearly "on." The criteria, for those who don't follow it closely, are:

 

•At least 2.2% of the issues traded on the NYSE in that day must reach new 52 week highs and new 52 week lows. This currently stands at either 69 or 70, depending on the day (it rounds slightly.)

 

•There cannot be more than twice the number of new lows in new highs. (It is ok for the new lows number to be more than double the new highs, but not the other way around.)

 

•The 10 week moving average must be positive. It is, right up until today (when the week closes), at which point it won't be any more. (A weekly moving average doesn't change it's signal until the week closes - this has nailed some people with one of my other longer-term signals, the 13/34 WEMA, in the last couple weeks.)

 

•The McClellan Oscillator must be negative on that day.

If all three occur, we're said to have a Hindenburg Observation. Two or more within 40 days trigger a confirmed Hindenburg Omen.

 

Note that the Hindenburg is not a warning of an imminent crash, even though every market crash in the modern era has been preceded by one.

 

However, the probability of a greater than 5% move to the downside (from the date of the confirmation) exceeds 70% within the next 120 days (four months); the odds of a panic selloff (defined as a rapid 10% or greater decline) is about 40%, and the odds of a crash (defined as a 20% or greater rapid decline) is approximately 20%.

 

There are, however, a couple of flies in the ointment. The first is that the timing of the panic is highly-uncertain. It has occurred as soon as the next day and as far out as four months in the future. In the present case this puts the predicted event anywhere between now and roughly Christmas.

. . .

Just remember, before doing the short the phone book deal, that there's anywhere from a three in four to four in five chance that a crash will not happen.

 

But since a market crash is such a life-altering event if you are long the market when it occurs, it is my considered opinion that being unguarded against such a possibility is exceedingly unwise.

 

This is amplified by the general technical posture. We have a high "fractal" correlation with the last crash in 2008 today (which I've posted a couple of short Youtube videos on) and there is a pattern known as a "head and shoulders top" that also completed yesterday:

 

saupload_hs_small.serendipitythumb.png

That targets 1010. The bad news is that if the target is reached it will confirm the following:

 

saupload_hs_large.serendipitythumb.png

 

That latter chart is one I've been showing in the nightly videos now for over a month, when it first came into play. I left the price lines and targets alone (so as to deflect criticism that I'm "editing things after the fact".) While the bounce that I expected from under the neckline was longer and stronger than expected, the overhead resistance "warning level" stopped the bounce dead, exactly as I pointed out it should when the pattern first appeared.

 

This larger pattern is confirmed and targets SPX 880, which by most people's definition will come dangerously close to being a "crash", approaching 20% down from here.

 

I won't show you the last and most-ominous pattern - but if you pull up a monthly 20 year chart you should see it, given the previous two. No, 880 won't confirm that - we will have to violate the March 2009 lows to confirm that pattern. But if we do...... well, you do the math.

 

Trade wisely, young Skywalker......

 

/more: http://seekingalpha.com/article/221576-shi...burg-approaches

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DENIAL of Validity - by some

 

Some folks are denying the validity of the signal - I wonder if they are aware that a second (confirming) omen came out, raising the historical accuracy from maybe 25% to about 75%. Here's an example of a "denying" article:

 

Hindenburg Omen

 

Recent market action has led to talk about the Hindenburg Omen, a stock market indicator, being triggered. The Hindenburg Omen has gotten a fair amount of press. Several friends and acquaintances mentioned the Hindenburg Omen and wanted to get my thoughts. Here is a recent article.

 

Interestingly, even within the articles, there are several statistics that state that the indicator, while scary, also gives false signals (as does every trading system). In particular, DailyFinance.com quotes analysts who say that only 25% of Hindenburg signals resulted in declines that can be considered crashes.

 

Other analysts use smaller filters and report varying levels of “forward information” for this indicator. Overall, the Hindenburg Omen DOES signify higher risk ahead, but investors should be aware that there are also some false signals.

 

 

Based on how the indicator is computed, there DOES currently seem to be:

 

A lot of undecided action (high level of new highs and new lows), combined with,

Divergences and negative market action – (generally rising market, negative McClellan Oscillator, and a suddenly declining market).

Wall of Worry and Investor Sentiment

 

Indicators like the Hindenburg Omen and the bearish environment make me think of the “Wall of Worry” – that may allow the markets to continue to climb. That is, contrarian investors believe that markets can continue to climb if there is a lot of pessimism out there. Thus, there is a commonly-used phrase, “climbing the Wall of Worry.”

 

Indeed, one Investors’ Sentiment indicator (see here) is flashing the highest bearish readings it has ever recorded, “far greater than back in February 2009, just before the market bottomed.”

 

/more: http://seekingalpha.com/article/221762-the...-market-outlook

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DENIAL of Validity - by some

Some folks are denying the validity of the signal - I wonder if they are aware that a second (confirming) omen came out, raising the historical accuracy from maybe 25% to about 75%.

Bob McHugh has an answer to those in Denial of the HO

 

The argument that the Hindenburg Omen is irrelevant because so many of the listings on the NYSE, especially those of the New High "stock" group recorded for the Omen, are some type of Fixed Income product (ETFs, preferred stocks, etc) that the Omen isn't really capturing stocks when it says "we got x % New Stock Highs," therefore the Omen is irrelevant is false.

 

The argument that the "stock market Omen" isn't measuring the internals of "the stock" market is false.

 

Here is why: A huge percent of NYSE stocks are financials, banking firms, and include firms such as General Electric which is essentially a financial firm, although many people would not think of them that way. These financial firms hold substantial positions in fixed income securities. Almost every bank listed on the NYSE carries a bond portfolio somewhere between 15 and 30 percent of their entire balance sheet, and have for years, going back far beyond the past 25 years of our research, a period of time when the Hindenburg Omen worked just fine, thank you very much. Bond and other fixed income products are prevalent throughout the distribution of companies listed NYSE, and have been for years.

 

This Omen has worked for at least the past 25 years. It accurately called the stock market crashes of 2007 and 2008 when the NYSE included many stocks holding significant positions in fixed income instruments. It does not matter. Our entire economy has essentially moved from a manufacturing base to a financial base. This makes the Hindenburg Omen relevant. I would not ignore this potential stock market crash warning. I personally do not like the odds at all.

 

Monday, August 23rd, 2010 did not produce an additional Hindenburg observation because New Highs were more than twice New Lows. However, we now have a confirmed "official" Hindenburg Omen Stock Market Crash Warning signal. Friday, August 20th, 2010 saw a clear-cut, no-doubt-about-it H.O. observation, unlike Thursday, August 19th's more controversial "rounded" observation. Friday's signal confirms Thursday, August 12th's first observation, so we now have at least two, a cluster, and are now on the clock of the far greater than normal possibility of a economy-rattling stock market crash starting sometime over the next four months

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McHugh again, this time writing for market oracle:

 

http://www.marketoracle.co.uk/Article22097.html

 

We got a second official confirmed Hindenburg Omen observation Friday, August 20th, 2010 after getting a first observation Thursday, August 12th, 2010

 

It seems that HO's need to strongly pass through the criteria and to be of value. HOs that scrape through or that pass through due to rounding need to be ignored. Both Aug 12th and Aug 20th got through comfortably.

 

We did get a "rounded" third Hindenburg Omen observation Thursday, August 19th, 2010, where the lower of New Highs and Lows came in at 2.18 percent, which is just shy of the required 2.2 percent level, but rounds up to 2.20. Rather than include this as an observation with an asterisk, we are just counting the two from August 12th andAugust 20th to avoid controversy. The point is, we have an official confirmed Hindenburg Omen with at least two observations at this time, and no asterisk.

 

 

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McHugh again, this time from 2008, listing previous HOs:

 

mchugh070408a.gif

 

(1) In September 2005, the Fed pumped $148 billion in liquidity from the first week in September, just before the Hindenburg Omens were generated — to the third week of October, an 11 percent annual rate of growth in M-3 (2.5 times the rate of GDP growth and 5 times the reported inflation rate), to stave off a crash. The liquidity held the market to a 2.2 percent decline from the initiation of the signal.

 

(2) In April 2004, the Fed pumped $155 billion in liquidity from the last week in April — right after the Hindenburg Omens were generated — to the third week of May, a 22 percent annual rate of growth in M-3, to stave off a crash. Even with the liquidity, the market still fell 5.0 percent.

 

(3) The 12/23/1998 signal barely qualified, as the McClellan Oscillator was barely negative at –9, and New Highs were nearly double New Lows. Had this weak signal not occurred, condition # 5 would not have been met. This skin-of-the-teeth confirmation may be why it failed. It says something for having multiple, strong confirming signals.

 

 

 

The italian site that Perishabull listed on page one is clearly not updated for new HO occurances. I do wish there was a way of using market data to confirm the occurnces myself, but I cannot find all the data I need online!

 

 

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I think it would be quite possible to create your own omen. Just bundle together a whole bunch of indicators and back test them if at first your omen fails then keep changing the mix until it works on historical data.

 

If you look at the composition of the Hindenberg omen it relies on a whole range of indicators to make it fit the market history.

 

 

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I think it would be quite possible to create your own omen. Just bundle together a whole bunch of indicators and back test them if at first your omen fails then keep changing the mix until it works on historical data.

 

If you look at the composition of the Hindenberg omen it relies on a whole range of indicators to make it fit the market history.

And it was put together by a "blind guy".

But I think it is legitimate, not just manufactured. And it makes sense:

Many new highs and new lows at the same time suggests a strong difference of opinions, with a Bullish concensus breaking down

for some sectors of the market

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AR-308299971.jpg

 

Observers also note that sentiment indicators appear to be bullish.

 

BEAR TRACKS

 

The weekly AAII Investor Sentiment Survey, for example, has been showing a growing number of bears among those surveyed — a bullish sign given that this index, which measures the mood of individual investors, is considered a contrarian indicator.

 

During the week ended May 5, which was near the end of the most recent stock-market rally, AAII bears represented 29% of those polled. For the week ended Aug. 18, after a 6% slide in the market, 42% of AAII members were bearish.

 

By way of contrast, when the market was approaching its nadir in early March 2009, 70% of AAII members were bearish — confirming the index's contrarian value since stocks started a strong ascent shortly thereafter.

 

Since the survey began in 1987, its average bearish reading is 30%.

 

Sentiment indicators overall are at best a mixed predictive tool, said Jason Goepfert, president of Sundial Capital Research, which tracks measures of investor psychology.

 

“Sentiment only rarely slides to an extreme, and right now we're not seeing it” either way, he said.

 

== ==

 

Observers of the Hindenburg Omen and similar measures say that once closed-end funds and other non-operating companies are excluded from the universe of stocks, these indicators don't actually point to the exits.

 

Besides, the record for the Hindenburg signal is mixed, Ned Davis, president of Ned Davis Research Inc., wrote last Monday in a research note. It gave timely sell signals in October 2007 and June 2008, but it also gave false warnings in 2004, 2005 and 2006, as well as in the 1990s, the firm noted.

 

The iffy track record aside, “a period with a lot of new highs and new lows is a sign of an unstable tape that often leads to trouble,” Mr. Davis wrote.

 

Advisers who use technical tools to make tactical investment decisions foresee the market running into more trouble over the next few months. Many were worried when the S&P 500 recently approached 1,050, which they view as the market's testing of a key support level.

 

When looking at market performance through a technician's eyes, a head-and-shoulders chart pattern, with the April highs forming the head, could indicate that the market is rolling over to the downside if the shoulder made at around 1,050 is broached for good, advisers say.

 

“If it breaks down a little further, and if [the market] doesn't stabilize, we could be looking at 830” for the S&P 500, based on past support levels, Mr. Hepburn said.

 

“If the market holds below [1010] for a couple of days, 900 to 950 is the next support” level, said Brian Carruthers, founder of Brian Carruthers & Associates, which manages about $100 million.

 

The uptrend since March 2009 was broken with the July lows, Mr. Hepburn said. “The rally in July had the potential to re-establish the uptrend — and it failed.”

 

/more: http://www.investmentnews.com/article/20100829/REG/308299971

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Jim Puplava said in the last FSN that it seemed almost as if the Hindeburg Omen was indicating market bottoms. :lol:

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Celebrations by Bulls may be premature. Yesterday's action signalled a possible top,

and we are still well within the Omen's "Crash Window"

 

Possible flash crash in metals has worsened it. I wonder if this will spread. I suggest we watch comms anf far east stocks over the next week.

Metalsflashcrash

interesting:

SINGAPORE, Sept 9 (Reuters) - Base metals fell sharply on

Thursday, with markets down more than 2 percent on average, on

talk of a Chinese probe on funds, making zinc the big loser

after open interest dropped almost 10 percent, traders said.

The rumours spread rapidly through China's commodity

markets, appearing to hit rubber, zinc and soy first before

rippling quickly to others.

For a graphic of Chinese commodity futures prices:

here

"We are investigating why there is a sharp decrease," said

Shi Yan, chief analyst with Xinhu Futures Co. Ltd. "There is

market talk over a crackdown over illegal funds, but we do not

have any reliable source for that."

Another analyst in Shanghai, who tracks vegetable oils,

noted the rumours driving the market, but was unable to

pinpoint a single cause for the selloff.

"A series of data releases is coming up in the weeks ahead,

including CPI and PPI, which, I think might have depressed the

market sentiment. But we're still investigating the reasons.

 

The Stock "flash crash" ended quickly & was reversed - This one may not.

 

In 2008, a drop in Commodity prices preceeded a stock rout

== == ==

 

Gold bears some close watching too ... update

zzz1l.gif

 

I am not short on Gold, but i am tempted when I see action like this.

I have been whittling down my holdings of Juniors, and raising cash, which is mostly parked in the "strong" C$ for now.

 

C$ are outperforming Gold over the past two weeks : update

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