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In spite of trade uncertainties still looming in the background, the U.S. stock market continues to trade well. At the moment (Tuesday, September 11, 1 PM Eastern), it appears that the S&P 500 has successfully tested the support level formed by the old highs at around 2872 as well as the rising 20- day moving average (Figure 1).
Source: StreetSmart Edge®
I would be remiss, though, if I didn’t mention that the Hindenburg Omen flashed four times last week, on September 4,5,6 and 7 (Figure 2). On the chart, value of “3” represents a flash.
For those not familiar with this relatively obscure technical indicator, here is some background.
The creation of the Hindenburg Omen (HO) dates to the 1990s and is generally credited to a blind former physics teacher named Jim Miekka who died in 2014.
Miekka claimed in a 2011 interview that the Omen has appeared ahead of every market crash in the U.S. from 1987 but he also admitted that not every Omen signal means the market will crash. As he put it, “not every tropical storm turns into a hurricane.”
The theory behind the Omen is that at major turning points, divergences begin to develop within the market. Generally, in a strongly uptrending market, one would expect to see many more new 52 week highs than lows and in a strongly downtrending market more new 52 week lows than highs. The Omen looks for periods when large numbers of both 52 week highs and lows are occurring at the same time.
The traditional definition of the Hindenburg Omen contains four criteria listed below, and is based on NYSE data. Over the years various authors have deviated from the original strict definition by adding or subtracting criteria depending on their own research.
1. The daily number of new NYSE 52 week highs and the daily number of new NYSE 52 week lows must both be greater than 2.2 % of total advancing or declining issues traded that day. Some analysts now use 2.8%. This criterion shows the divergence that is occurring within the market.
2. The NYSE 10 week moving average is rising. This criterion tells us that the market has generally been rising in the intermediate term. More recently, technicians have altered this to require instead that the NYSE is simply trading at a higher level than it was fifty days ago.
3. A technical indicator called the McClellan Oscillator is negative on the same day. This indicator is a market breadth indicator based on advance/decline data. It is calculated by taking the difference between the 19 day and 39 day exponential moving averages of advancing minus declining issues. A negative reading implies that the number of declining issues, on average, is growing faster than the number of advancers, a potentially bearish condition.
4. The new 52 week highs can’t number more than twice the new 52 week lows, although it is fine if the 52 week lows are more than twice the 52 week highs.
A HO signal is considered valid for the next 30 (some say 40) day period. Some authors feel that one signal occurring in isolation is not as predictive as seeing multiple signals within a thirty day period. We are currently seeing such a cluster.