The Hindenburg Omen, which is said to predict a stock market crash, is a combination of technical patterns that measures the health of NYSE extended to stock markets as a whole.
A crash is predicted after Jin Mekka, who has a reputation of accurate market linked forecasts, sighted Hindenburg Omen. Wall Street has turned into a Titanic ship after news of Hindenburg Omen has been flowing.
Hindenburg Omen is predicted on the basis of the following conditions:
The daily number of stocks hitting 52-week high and daily number of stocks hitting 52 week low must be as high as the lesser of the two should be greater than 2.2% of Total NYSE issues traded that day. Also, the NYSE 10 week moving average should be increasing and the McClellan Oscillator is negative on the very same day. These three conditions are to be calculated every day using Wall Street Journal figures.
On Aug 14 2010, there was one indication of Hindenburg Omen, the Total number of 52-week High were 92 and 52-week low were 81, the lesser of the two numbers were greater than 2.2 percent that is 69 (2.2% of 3126 stocks). However, on August 23, the other conditions were also confirmed, with 36 52-week highs and 52-week lows were 69, exactly the number to trigger the first condition. McClellan oscillator was also negative at -83.6 and the third and final condition 10-week moving average also increased. The more confirmations, the scarier it gets from a technical perspective.
However, there are disagreements over the signs of Hindenburg Omen. Daryl Guppy, CEO of Guppytraders.com, said to CNBC “The criteria for the omen are fairly complex, but are focused on the level of uncertainty within the NYSE. It watches for a lack of conviction among investors. Investors shouldn’t place too much store in the crash indicator. This is not to dismiss the indicator, but like all good technical analysis, the signals from one indicator should be verified using signals from another indicator that measures the same events in a different way.”
As per Guppy the NYSE is developing a head-and-shoulder reversal pattern, which again is not fully verified.
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