The Omen finally got triggered today, first, a quick refresher of what the Omen is:
It is a set of conditions, and rules that when all are met, greatly increases the odds of a large sell-off, or crash of the markets. In fact no crashes in the last 22 years have happened, that did not first have a confirmed signal of a Hindenburg Omen. Just because all the conditions have been might, and it becomes a confirmed Hindenburg Omen does not guarantee a crash, only greatly increases the chances of a severe market correction ahead. Another way to think about it is without a confirmed Hindenburg Omen in place, Bulls can sleep a little better at night knowing that most likely they will not awaken to the market down 10%. In fact the odds of a crash based upon the history since 1985 is 27% chance after two or more signals were confirmed.
The best way to think about it is under normal conditions, there can be large number of stocks, setting new 52 week highs, or a large number setting 52 week lows, but not both. Things become out of balance when large numbers of stocks are setting new highs, and lows at the same time. Having one sector soaring, and another setting new lows is not good in the balance of a healthy market.
The traditional definition of a Hindenburg Omen is that the daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day.
And that has been updated to include two more sets of conditions to filter out false readings;
1-That 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.
2-That the smaller of these numbers is greater than 75. (this is not a rule but a function of the 2.2% of the total issues) ( as of 7-12-2010, 69 issues are all that is required for the 2.2% rule!!)
3-That the NYSE 10 Week moving average is rising.
4-That the McClellan Oscillator is negative on that same day.
5-That 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.
Rules 1 and 2, are pretty much addressing the same criteria, because if you have 75 issues making new highs/lows, then mathematically, you also have achieved 2.2%. The numbers of issues fluctuates daily and it is quicker to use rule number 2. In other words, if condition 2 has been met, then condition 1 will be met by default.
The 10 week Moving Average is trending upwards, satisfying rule #3
The McClellan Oscillator is below "0", satisfying rule #4
The number of new 52 week highs today closed above 75, satisfying rules #1, and #2
The number of new 52 week lows surpassed 75 today, and closed at 76, satisfying rules #1, and #2, and since the number of new highs are not twice the number of new lows, rule #5 has been satisfied
So, now that we have all five conditions met, now what?
We have an unconfirmed Hindenburg Omen, In order to have a CONFIRMED Hindenburg Omen you must have more then one unconfirmed Hindenburg Omen, or signal, in a 36 day or less period.
Another interesting observation is that once you get two confirmed Hindenburg Omens in a 36 day period , the probability of a severe decline does not seem to increase as more Omens occur, it is possible to have multiple Omens before a crash happens. Multiple signals are telling us things are not getting better, that something continues to be out of balance in the markets.Things are going to be very interesting now that we have a signal.
McHugh's research noted that plunges can occur as soon as the next day, or as far into the future as four months.
Disclosure: long TZA