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.