Hindenburg Omen

[Tirebldr]

On Stockbee's webpage this morning ( http://stockbee.blogspot.com/2007/06/market-monitor_25.html ), I received a very interesting read on something I had never seen, called the Hindenburg Omen ( http://www.safehaven.com/article-3880.htm ).

In the past few months I've learned quite about from this investor and have come to trust his posts almost as much as David's. I thought this might interest some of you.


I quote from stockbee's page:

    * There is lot of chatter in the technical analyst community about Hindenburg Omen.

    The Hindenburg Omen is a technical analysis signal that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster, the crash of the German zeppelin of the same name in May 1937. The Hindenburg Omen is the alignment of several technical factors that measure the underlying condition of the stock market - specifically the NYSE - such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows - but not both. When both new highs and new lows are large, it indicates the stock market is undergoing a period of extreme divergence. Such divergence is not usually conducive to future rising prices. A healthy market requires some degree of internal uniformity, whether the direction of that uniformity is up or down.

    Criteria

    The traditional definition of a Hindenburg Omen has five 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 smaller of these numbers is greater than 79.
        * That the NYSE 10 Week moving average is rising.
        * That the McClellan Oscillator is negative on that same day.
        * 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.

    These measures are calculated each evening using Wall Street Journal figures for consistency. The occurrence of all five 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.

    Conclusions

    The probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen within the next 41 days after its occurrence is 77%, the probability of a panic sellout is 41% and the probability of a real big stock market crash is 25%. The occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down. On the other hand there has never been a significant stock market decline in history, that was not preceded by a confirmed Hindenburg Omen.

[saffeysite1]

Tire,

Those are great stats and interesting stuff, but dont get caught up in forecasting.  Its bad for trading. just go with the trend until it changes.  Look for weaking signs on the weekly and monthly MACD and momentum lines with rising prices.  That would portend bearish signals.  Right the market is in a trading corridor, no real trend, so you stay on sidlines with no new positions, just sit tight with open positions with tight stops to protect profits.  When the trend changes:down, sell and go short, if the market moves up past old highes, add to long positions.  Thats it.  You should be able to write down on a business card your trading method and stategy, if not it is to confusing and your trading will be confusing. 

Hope I cleared up the Omen,
-Saffeysite.