Charting 101: The Omen You Cannot Ignore

December 12, 2016

The U.S. markets are in a super bubble.

But if the latest technical setup is right, the bubble could soon burst.

Known as the Hindenburg Omen, it typically warns of the possibility of stock market crashes.  The last time it appeared, investors foolishly ignored it in December 2015.

In fact, some noted, “We don’t think this particular instance of the Hindenburg Omen is going to turn into a big selloff.”

Shortly after, the Dow plunged 2,100 points, wiping out trillions of dollars.

Typically, the scenario is triggered by a divergence of the number stocks hitting new highs, as compared to those making new lows.

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The traditional Omen is characterized by the following.

One, the daily number of NYSE new 52-week highs and the daily number of 52-week lows must both be greater than 2.2% of the total NYSE issues traded that day.

Two, the smaller of these numbers must be greater than or equal to 69 (68.772 is 2.2% of 3126).  This condition is a function of the 2.2% of the total issues.

Three, the NYSE 10 Week moving average must be rising.

Four, the McClellan Oscillator must be negative on that same day.

Five, new 52 Week Highs cannot be more than twice the new 52 Week Lows.

However, it also needs confirmation.  Seeing it once is an unconfirmed trend. For it to be confirmed, it must appear a second time within 36 days of the first signal.

While it may seem like a lot of hocus-pocus, what’s interesting is that if you look at each massive sell-off since 1985, it was preceded by the same Omen. 

Granted, the Omen is not always a guarantee of a crash, but if we look back at historical data, the probability of a move greater than 5% to the downside has occurred about 77% of the time, according to The Wall Street Journal.

It can also forecast a 10% to 15% down move up to 41% of the time… and up to 15% downside 24% of the time.

Should it be relied upon all the time?

Of course not… There’s no such thing as a Holy Grail of technical setups.  But it’s a warning sign that should not be avoided so quickly.

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