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Lift your lamp beside the golden door, Break not the golden rule, avoid well the golden calf, know; not all that glitters is gold, and laissez faire et laissez passer [let do and let pass] but as a shining sentinel, hesitate not to ring the bell, defend the gates, and man the wall

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Saturday, September 25, 2010

The Hindenburg Omen

The Hindenburg Omen  

[Wiki bloody Pedia] 
A technical analysis pattern that is said to portend a stock market crash; 
named after the German Zeppelin/Airship 'Hindenburg'  that exploded as it was docking in New Jersey on May 6, 1937.

Mechanics

The Hindenburg Omen is a combination of technical factors that attempt to measure the health of the NYSE, and by extension, the stock market as a whole. The goal of the indicator is to signal increased probability of a stock market crash.

The rationale is that under "normal conditions" either a substantial number of stocks may set new annual highs or annual lows, but not both at the same time. As a healthy market possesses a degree of uniformity, whether up or down, the simultaneous presence of many new highs and lows may signal trouble.
 

Criteria

         These criteria are calculated daily using Wall Street Journal figures for consistency. (Other exchanges may be used as well.) Some have been recalibrated by Miekka to reduce statistical noise and make the indicator a more reliable predictor of a future decline.


1. 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 (typically, 84) of the sum of NYSE issues that advance or decline that day (typically, around 3000)[3]. An older version of the indicator used a threshold of 2.5 percent of total issues traded (approximately 80 of 3200 in today's market).
2. The NYSE index is greater in value than it was 50 trading days ago. Originally, this was expressed as a rising 10 week moving average, but the new rule is more relevant to the daily data used to look at new highs and lows.
3. The McClellan Oscillator is negative on the same day.
4. New 52 week highs cannot be more than twice the new 52 week lows (though new 52 week lows may be more than double new highs).
The traditional definition requires each condition to occur on the same day. Once the signal has occurred, it is valid for 30 days, and any additional signals given during the 30-day period should be ignored. During the 30 days, the signal is activated whenever the McClellan Oscillator is negative, but deactivated whenever it is positive.

To eliminate false positives some technical analysts have imposed the condition that the Hindenburg Omen must be triggered three times in a row within a month from the first triggering event for said initial trigger signal to be considered to be valid (i.e. requires double confirmation) is only valid when "all tightly coupled triggerings are within a fortnight" will indicate a possible future downturn or correction, depending on the magnitude of any "one off" triggering 

Recent Occurrences

  • August 12, 2010: The Omen's creator, Jim Miekka, considered the Omen officially triggered on this date with 92 and 81 new 52-week highs and lows, respectively. The McClellan Oscillator was a negative -120.03 and the 10-week NYSE moving average was rising; the market closed above its open of 50 days prior (May 27). In the ensuing week, the Omen narrowly missed confirmation twice (August 13 and 19).
  • August 20, 2010: According to the Wall Street Journal, the omen was confirmed on Friday, with 83 new 52-week highs and 95 new 52-week lows on the NYSE. The McClellan Oscillator was a negative -106.46 and the 10-week NYSE moving average was rising; the market closed above its open of 50 days prior (June 11).
  • August 24, 2010: 166 New Lows, 87 new Highs, McClellan Oscillator was negative, but the 10 week average began to fall. (Non-Confirmation.) (Although the 12 week average is still positive.)
  • August 25, 2010: 150 New Lows, 90 new Highs, McClellan Oscillator was negative, but again the 10 week average was falling (Non-Confirmation.) (Although the 12 week average is still positive.)
  • August 31, 2010: 86 New Lows, 164 new Highs, McClellan Oscillator was negative, and the 10 week moving average was up slightly 8.86 (0.13%) but falling (non-confirmation)
  • September 5, 2010 - September 16, 2010: McClellan Oscillator was positive and negates the previous signals in August 2010  
[Forbes]-


The Hindenburg Omen, named after the airship that exploded as it was docking in New Jersey in 1937, has preceded every crash since 1987, but it has also popped up plenty of times without any subsequent market decline. It resurfaced in mid-August and became popular fodder for various trading oriented blogs. It was triggered by two important statistical events. One, NYSE highs and lows both exceeded 2.5%stocks reaching 52-week highs were 2.9% of stocks traded at the Big Board, while stocks hitting 52-week lows were 2.6%. And two, a rising 10-week moving average for the NYSE compared to a negative indicator that shows market fluctuations (the McClellan Oscillator) -[Forbes]
"I'm taking it seriously and I'm fully out of the market now... I would've probably stayed in unjtil the Beginning of September depending on how the indicators varied. That was my basic plan, until the Hindenburg came along." -Jim Miekka, The creator of the Hindenberg Omen (August 23 2010) The Wall Street Journal

About the Hindenburg Omen: “sort of like a funnel cloud. It doesn’t mean it’s going to crash, but it’s a high probability. You don’t get a tornado without a funnel cloud.” -Jim Miekka

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