Stock Market Crash Signal: Hindenberg Omen on April 7, 2006
Posted by Frugal on May 10th, 2006
Hindenberg Omen is one of the rarest technical signals that can be generated from the stock market. This technical signal is specifically targeting to detect a substantial market correction or a market crash.
Here is the definition of Hindenberg omen directly from wikipedia.org
The traditional definition of a Hindenburg Omen has three criteria:
- 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.
- That the NYSE 10 Week moving average is rising.
- That the McClellan Oscillator is negative on that same day.
These measures are calculated each evening using Wall Street Journal figures for consistency.
A fourth condition is sometimes added:
- that new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is ok for new 52 Week Lows to be more than double new 52 Week Highs).
The occurrence of all three (or four) criteria on one day is often referred to as an unconfirmed Hindenburg Omen.
A confirmed Hindenburg Omen occurs if a second (or more) Hindenburg Omen signals occur during a 36-day period from the first signal.
This signal has been present in all past stock market crashes in the last 21 years, and there were only 24 confirmed signal in this period. Whenever this signal flashes, it is showing a great divergence and internal weakness in the stock market. It appears that Fed is also watching this signal, and will pump up liquidity to support stock market (as in Sep 2005).
Despite my extreme uncomfortableness with this signal that was generated on April 7, 2006, and subsequently confirmed, I still believe that US Fed is going to stave off crash at all cost in order to avoid simultaneous corrections in both stock and housing markets. Since US Fed has stopped publishing M3 money statistics, they are pretty much at liberty to print as much money as they needed. Because of the same reasons, I believe a major chunk of liquidity will keep going into the current out-performers: precious metal, energy, and emerging markets. Despite that precious metals are in the blow-off stage for its intermediate top, I believe the liquidty will simply support the bull run beyond any bull’s wild imagination. For the Fed, there is not much choice. It’s either inflate or die. If one studies the market reaction to the last Hindenberg Omen in September 2005, it appears that the liquidity went into the best out-performers. Therefore, I am still holding onto my market view and my stock positions in general, with an only slight modification that precious metals will first rise even higher than today’s before going into a 20 to 35% decline. The timeframe allowed from Hindenberg Omen is 1 to some 90 days from the very first signal, so the next one or two months will be very volatile. Obviously, the biggest casualty will be $US dollar and inflation rate from all of these money printing. With Iran setting up the oil trading in euro, $US dollar will face even bigger downside.
For more information on Hindenberg Omen, please check out Robert Hugh’s article to and his website at TechnicalIndicatorIndex.com.
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May 10th, 2006 at 9:52 pm
I’ve been expecting a correction for a while now and have moved to 50% cash in our retirement accounts. My gut feeling is that the Dow will make a new high soon, we’ll get some confidence in the market and then see a slide through the summer and into October or so when we’ll pick up again. Should be some good buying ops…
May 10th, 2006 at 11:33 pm
I believe Dow will make new high too, but simply because it is the easiest to be manipulated by Fed (just my guess). At least, so far, it appears that way. Dow is leading most of the time, and the so called Dow theory has been indicating positive signals so far. I’m sure if there are manipulators, they would never let Dow Theory gives out sell signal.
May 11th, 2006 at 1:30 am
I’m a novice to investing and financial markets. I’m interested in learning more about what you mean and why you say that precious metals are at an intermediate top and expect a 20% decline from today’s levels. Thank you.
May 11th, 2006 at 10:10 am
I don’t know exactly where the intermediate top will be. Gold is getting very close to my target at $750 as described in my previous post My Take on the Market Outlook. But I do know once precious metals reach its intermediate top, it will DEFINITELY decline by probably 20% and possibly up to 50% in precious metal stocks. By intermediate top, I mean that a peak, or a local maximum point is reached. This peak will be exceeded again in the coming years I believe. It’s not the final top. Unfortunately, it is extremely difficult to call any top. And one of the problem with such topping process is that a lot of gains will occur very late in the topping cycle as we have been seeing in the spot gold price. There are other topping processes, but a parabolic topping process is harder to deal with. At this level, I personally will only recommend putting very small percentage of your total allocated capital into precious metal market. I would say maybe 5% of your total allocated capital. And your total allocated capital for this market may be 5% to some outrageously high of 40% of your total networth.
May 11th, 2006 at 10:38 am
By intermediate top, I mean a local maximum, or a peak in the chart. I firmly believe that this top is not the final top. It’s very hard to call a top in such a parabolic topping process as in precious metals now. Often, the majority of gain will occur late in the cycle in a short timeframe. However, once the intermediate top is in, it is possible for it to decline minimum of 15%, and possibly even up to 50% in precious metal stocks (although I don’t expect it to be).
Please don’t be confused about the market of precious metals and the general market because they act VERY differently.
You can read more about my thinking at My Take on the Market Outlook.
May 11th, 2006 at 12:14 pm
Thank you for your fast response. I’m become very interested in silver in the last few weeks, and am thinking about putting my entire Roth IRA from the 500 index to the silver ETF. I’m just scouring the internet looking for reasons why I would be an idiot to do that. However, all I read indicates silver is going to go way up despite any short term corrections. I would’ve already made my move, except I’m waiting for Scottrade to receive the funds from the former custodian, which could take another week and a half. Meanwhile, silver zoomed up to $15 while I helplessly watch.
May 11th, 2006 at 12:20 pm
I am having some internet problem, and I have posted two similar replies to your question. Personally, I’m not doing much buying of precious metals, stocks or ETFs. But this is a definitely a runaway bull. Who knows? Maybe parabolic rise will keep continuing. I only noticed that every short term dips are becoming shorter in duration (at most 1 day), and shallower in depth. I believe that in the event of precious metal correction, it will be shallower than I think it will be.
June 13th, 2006 at 2:39 am
Rethinking on the Gold Correction…
Overnight in Asian market, gold has broke thru $600 down to $590. It looks like $570-$580 is a definite possibility, and $550 is looking more real these days. The million dollar question is of course whether this is the time to buy. My gut feelin…