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Hindenburg Omen Indicator, Sep 2010 crash
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Hindenburg Omen Indicator, Sep 2010 crash

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Hindenburg Omen Indicator, Sep 2010 crash

Is September 2010 going to be a disastrous month?

What is the Hidenburg Omen?


Quoting 
A technical indicator named after the famous crash of the German airship of the late 1930s. The Hindenburg omen was developed to predict the potential for a financial market crash. It is created by monitoring the number of securities that form new 52-week highs relative to the number of securities that form new 52-week lows - the number of securities must be abnormally large. This criteria is deemed to be met when both numbers are greater than 2.2% of the total number of issues that trade on the NYSE (for that specific day).

Source: Investopedia


Quoting 
All the biggies over the past 21 years were identified by this signal (as defined with our five conditions). It was present and accounted for a few weeks before the stock market crash of 1987, was there three trading days before the mini crash panic of October 1989, showed up at the start of the 1990 recession, warned about trouble a few weeks prior to the L.T.C.M and Asian crises of 1998, announced that all was not right with the world after Y2K, telling us early 2000 was going to see a precipitous decline. The Hindenburg Omen gave us a three month heads-up on 9/11, and told us we would see panic selling into an October 2002 low. And now we have another confirmed Hindenburg Omen signal, here in the autumn of 2005.

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Source: Safehaven

Now the second data set is a few years old, and in all cases hindsight is used extensively. I thought I would put it out to you guys to see what you think about this "omen indicator"

Mike

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Will it become a self-fulling prophecy? Or will it be a case of trade the rumor and cover the fact?

R.I.P. Andy Zektzer (ZTR), 1960-2010.
Please visit this thread for more information.
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Mike

(Daily chart of 1987 crash in attachment.)

One can see that the market was moving down BEFORE the day of the crash.

Regardless, just buy some deeply out of the money puts on the OEX if you're concerned
about a crash.

- Stephen

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Black swan theory

The Black Swan Theory or "Theory of Black Swan Events" was developed by Nassim Nicholas Taleb to explain

1) the disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology,

2) the non-computability of the probability of the consequential rare events using scientific methods (owing to their very nature of small probabilities) and

3) the psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.

Unlike the earlier philosophical "black swan problem", the "Black Swan Theory" (capitalized) refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.





Identifying a black swan event

Based on the author's criteria:

The event is a surprise (to the observer).
The event has a major impact.
After the fact, the event is rationalized by hindsight, as if it had been expected.

Black swan theory - Wikipedia, the free encyclopedia

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The Dow climbed steadily for a little over two years after the 2005 signal, but a head and shoulders is forming on the monthly chart right now, so...

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10 year monthly chart of DJIA in attachment

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yeah, see what i mean, it's all going down man

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The Hindenburg Omen is basically a divergence between price and market breadth. A short term EMA is still up, while the McClellan Oscillator which is sort of a MACD applied to the difference between advancing and declining issues already has turned negative.

Add to this the tension created between a high number (> 2.2%) of new lows and a high number (>2.2%) of new highs. The meaning of this is that in an uptrend some sectors already turned negative, while some sectors are still producing new highs. There is a restriction of the ratio of new highs to new lows, which should be smaller than 2, because otherwise the negative interpretation would not be possible.

Some comments on the Hindenburg Omen:

(1) The methodology can only be applied to tops, because it requires S-class peaks. Stock market troughs are too sharp, so you would not find the requried numbers of highs prior to the reversal.

(2) A Hindenburg Omen is only valid, if repeated within the first 36 days of its occurrence.

(3) The number of observed Hindeburg Omens does not yet reach statistical significance, so with all the criteria required, it may simply be a case of advanced curve fitting.

(4) Market breadth is a new information only available for stock markets, using market breadth in trading gives you are real edge, as it reveals the internal structure of a stock market. Rather than trading off a divergence between price and price, I would trade off a divergence between price and market breadth.

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Tyler Durden 's Take: The Hindenburg Omen Has Arrived | zero hedge

I started reading him just because of his nom de plume.

R.I.P. Andy Zektzer (ZTR), 1960-2010.
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