Stock Gravity – Free Market Forces! - Stock Market Trading & Investing – Free Market Forces

The Hindenburg was a German passenger airship which caught fire and came crashing down while attempting to land in 1937. Could this be a possibles scenario for the United States economy – the fed attempting a soft landing only to have the economy come crashing down? Interestingly enough a phrase called the “Hindenburg Omen” was coined to describe a series of technical events that coincide to predict stock market crashes.

Most of the time these types of signals are dismissed, except when they have a 77% accuracy rate. In fact, every stock market crash or panic type event in the last 22 years has been preceded by the omen. The Hindenburg Omen signal was given back on October 16th, 2007. In hindsight this was the beginning of the real estate market crash and the start of a stock market crash. The recent Hindenburg Omen signal on August 12, 2010 indicates we have a favorable chance for a significant stock market decline.

Criteria

The Omen’s creator, Jim Miekka required the following characteristics to be met:

1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day (currently, greater than or equal to 69, which is above 2.2% of 3126).
2. The NYSE 10 Week moving average is rising.
3. The McClellan Oscillator is negative on that same day.
4. New 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

Commentary

“The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows — but not both .” When both new highs and new lows are large, “it indicates the market is undergoing a period of extreme divergence — many stocks establishing new highs and many setting new lows as well. Such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn’t matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs. This is the condition that leads to important market bottoms.”   – Peter Eliades

PowerShares QQQ Trust

(NASDAQ: QQQQ ) Free Hindenburg Chart!

Statistics

• Only 8% of confirmed signals throughout history have failed to produce meaningful declines
• About 27% of confirmed Hindenburg Omens have preceded stock market crashes (15% or more)
• Major moves have proven to occur anywhere from 1-day to 4-months after a confirmed pattern
• 100% of all major stock market crashes in the last 22 years were preceded by the Hindenburg Omen

Although the Hindenburg Omen presents an impressive track record for predicting bearish moves in the stock market, speculators should  be cautious. As noted by its creator, the signal more often than not throws traders for one last wild ride before fulfillment. A final “bulltrap” or “headfake”  move higher usually occurs before the real plunge begins. Consequently, it might not be wise to go 100% short after the signal presents itself. Instead, you should consider cutting back on aggressive positions and moving into safe havens like gold and silver – even cash. With the Hindenberg Omen so widely talking about by the media, a major upward headfake seems likely! Bloggers and major investment websites alike have all talked up the pattern. Whatever side you are on, you can expect some volatility going forward.