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"
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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.
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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