Negative Warning Flashes – August 23, 2010
We have written in past letters about the Hindenburg Omen signal that we rarely see in the markets. It is a warning sign that has historically occurred prior to weak markets but more importantly has been recorded prior to every major market crash of the past 25 years. It does not necessarily indicate a crash is coming but we have recorded one prior to each crash.
The Hindenburg Omen (HO) signal is an indicator based in part on Norman Fosback’s High Low Logic Index. The signal itself has been adapted and modified by other technical analysts but attempts to measure the health of the stock market. It has been reliable in predicting crashes or weak market environments. The basic theory is that during normal market conditions either the number of stocks making new high or new lows will dominate. However, the HO is triggered when both new highs and hew lows reach a certain benchmark. Logically, this could also indicate volatility and indecision which are also often present in weak market environments.
The signal is generated when the number of NYSE new 52 week highs and the daily number of 52 week lows are both greater than 2.2% of total issues traded that day. Also, we look for a cluster of these signals in a short period of time in order to avoid a single isolated day. We have now recorded two days of these criteria and came very close last Thursday. The odds of a decline of at least 5% after a cluster of signals is greater than 75% and there is a 40% historical probability of a panic sell off.
The timing of the recent cluster of signals always brings caution as September and October are legendary for market declines and crashes. Given the current economic climate and the buildup of potential negative signals and our long term model still resting in Sell mode, we clearly advise caution at this time.
www.dtitrader.com 800.745.7444
Past performance not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.
