Saturday, 24 August 2013

Too early to call and the Hindenburg Omen

The papers are full of news about the Hindenburg Omen. I am not a big fan of complex technical indicators but since this one has hit the headlines it is worth explaining what it is all about.

Put very simply the number of 52 week highs AND the number of 52 week lows on a given day must exceed 2.8% of the stocks traded on the NYSE. There are other criteria to be met but this is the key one. The argument goes that normally the flow of the market should be mostly in one direction. The pattern of new highs and new lows occurring together suggests that market sentiment is confused so a crash is likely.

It is said that the Omen predicted the bursting of the Tech Bubble and the 2007 crash. Believers claim that the predicted crash will occur within 40 days of the Omen appearing. It has occurred several times over this summer - see below.

I'm sticking with my view that support and resistance lines are the best indicator of whether I should be in or out of the market. Currently I am out and the up indicator is still a way off.

There has been no helpful guidance from the official bodies, whose pronouncements are as clear as mud. They seem confused so it is not surprising that the market is confused. Confusion in a market that is highly leveraged is exceptionally dangerous because when shares are held using borrowed money forced sales will accelerate the pace of any decline. Hold onto your hats.

No comments: