Courtesy of John Nyaradi.
New Hindenburg Omen sparks market fears
The Hindenburg Omen sparked again on Wednesday, August 14, 2013, the sixth occurrence in the last nine trading days.
The Hindenburg Omen has now generated a record breaking streak of sightings in a concentration known as a Hindenburg Cluster.
The Hindenburg Omen has preceded steep declines in the S&P 500 (NYSEARCA:SPY) and Dow Jones Industrial Average (NYSEARCA:DIA) on multiple occasions:
- January-February 2000, just before the onset of the tech wreck
- Spring, 2006
- July, 2007 and October, 2007
- October, 2000
The Hindenburg Omen must meet specific characteristics as defined in Wikipedia:
- The daily number of NYSE new 52 week highs and the daily number of new 52 week lows are both greater than or equal to 2.8 percent.
- The NYSE index is greater in value than it was 50 trading days ago.
- The McClellan Oscillator is negative on the same day.
- New 52 week highs cannot be more than twice the new 52 week lows
Eery stock market crash going back to 1985 was preceded by a Hindenburg Omen and the probability for a significant stock market decline greater than 5% is 77% while chances of a major stock market crash are 25% over the next 40 days.
Bottom line: The Hindenburg Omen has been flaring nearly everyday, and while no indicator is perfect, an unusual cluster of Hindenburg Omens like today’s is certainly reason for pause or even concern. While controversial, the Hindenburg Omen is based on the theory that confusion and uncertainty are present in the stock market (NYSEARCA:SPY) and major U.S. indexes like the Dow Jones Industrial Average. (NYSEARCA:DIA)
The diverging number of new highs and new lows indicates a divergence in investor sentiment. Typically this is indicative of an unhealthy market because broad, healthy advances usually enjoy large individual stock participation. The more occurrences in a cluster, the more accurate the Hindenburg Omen tends to be; therefore, investors and traders will be carefully watching for more Hindenburg Omens and negative stock market action over the next four to six weeks.
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