About Hindenburg Omen

Now everyone is mentioning this term - Hindenburg Omen. Even it is on today's WSJ, English and Chinese. I posted a link in my previous blog. Here is the more details for review:

This Omen has appeared before all of the stock market crashes, or panic events, of the past 22 years.

Criteria: (http://en.wikipedia.org/wiki/Hindenburg_Omen)

1. 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 (currently, greater than or equal to 69, which is above 2.2% of 3126).
2. The NYSE 10 Week moving average is rising.
3. The McClellan Oscillator is negative on that same day.
4. 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.

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.

Historical Review:

1. The probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.

2. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%.

3. Out of the previous 25 confirmed signals only 8% (two) have failed to predict at least mild (2.0% to 4.9%) declines.

4. Of the previous 26 confirmed Hindenburg Omen signals, seven (27.0 percent ) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes. Three (11.5 percent) more were followed by stock market selling panics (10% to 14.9% declines). Four more (15.4 percent) resulted in sharp declines (8% to 9.9% drops). Six (23.0 percent) were followed by meaningful declines (5% to 7.9%), four (15.4 percent) saw mild declines (2.0% to 4.9%), and two (7.7 percent) were failures, with subsequent declines of 2.0% or less.

Recent occurrences

• August 12, 2010: A Hindenburg Omen occurred, the first since the market lows of 2009. One nearly occurred on August 11, failing only in that 67 stocks hit new lows, rather than the required 69.

• June 22, 2007: There were 3,422 NYSE issues traded, with 88 New Highs and 73 New Lows, the lesser number equal to 2.13 percent of total issues traded, almost 2.20 percent. The McClellan Oscillator was negative -116.59.

• June 21, 2007: There were 3,434 NYSE issues traded, with 106 New Highs and 75 New Lows, the lesser number equal to 2.18 percent of total issues traded, almost 2.20 percent. The McClellan Oscillator was negative -36.65.

• June 13, 2007: There were 3,428 NYSE issues traded, with 96 New Highs and 95 New Lows, the common number equal to 2.77 percent of total issues traded, above the minimum requirement of 2.20 percent. The McClellan Oscillator was negative -116.92.

What is the rationale behind this indicator?

(

http://www.hutong9.net/viewthread.php?tid=90359&extra=page%3D1)

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, 搃t indicates the market is undergoing a period of extreme divergence ?many stocks establishing new highs and many setting new lows as well. Such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn抰 matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs.

My take in for this indicator:

1. The indicator is not guarantee the occurrence of Stock. Crash.

2. As Cobra said,

You now also have to factor that the Fed is pumping liquidity to prevent crashes once these signals occur.

3. So my opinion about this: be cautious about this since it showed up, but not too cautious about this and short the stock right away. Stick to the discipline of your trading strategy, whether it is long term or short term. Change your way of trading smartly with the market and never against it.