Market Monitor | stockbee

6/25/2007

Market Monitor

  • Market continues to bounce around as bears anxious to press their bets to the downside get squeezed out, and under invested bulls buy every dips .
  • But last week this drama seems to have lost its plot. Market is rolling over and in the near term vulnerable to more selling. Till the market sets up again, cash is the best alternative.The near-term outlook is highly uncertain.
  • Month end, quarter end dynamics will add further volatility to tape. But markets inability to takeout the 500 plus level convincingly on 100 plus shows each bounce now is weaker.
  • Soon the earnings season will be upon us and offer some good opportunities.
  • 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.


6 comments:

Liz said...

Very interesting. Thanks for all the work on your great blog.

Art said...

I would think that by your pointing this out, we should be further on guard to an extreme downturn.

Thank You for the wrning Paradeep.

F. said...

Good stuff.

No big deal, but like I said before, this correction is not "garden variety", yet we have not seen any 200+ down days (yet).

Bill said...

Pradeep, good use of sarcasm, posting the Hindenburg Omen writeup! Love it!

mike said...

the article you quote from was written in 2005 of Oct and they predicted a big correction to follow-none followed so take this omen for what it is worth..

Pradeep Bonde said...

The signal is not a reliable signal like most technical analysis based signal.