The Hindenburg Omen – that’s a Robert Ludlum novel, right? The Death Cross – isn’t that a wrestling move from the WWE?

Wrong. They’re both technical indicators – and bad ones, because they signal the likelihood of the stock market plunging downward.

And they’ve been seen recently.

The Hindenburg Omen is the name of a group of five indicators which, when they occur at the same time, have historically warned of an impending crash.

Jim Miekka, the editor of US stock market newsletter The Sudbury Bull & Bear Report, who first identified the Hindenburg Omen in 1976, says it occurred on August 12, 20, 24, 25 and 31.

Influential US market blog Zero Hedge describes the Hindenburg Omen as: “Easily the most feared technical pattern in all of chartism (for the bullishly inclined). Those who know what it is, tend to have an atavistic reaction to its mere mention.”

The “Death Cross” is another indicator that is also supposed to spell doom for the stock market whenever it occurs. It occurs when either a 50-day moving average for an index crosses under its 200-day moving average, on a daily chart; or a ten-week moving average crosses under a 30-week moving average, on a weekly chart.

At least the Death Cross has a positive mirror-image: the “Gold Cross”. But the Hindenburg Omen is all bad.

Named for the airship disaster in May 1937, the Hindenburg Omen has five components:

•    That the daily number of 52-week highs and the daily number of new 52-week lows recorded on the New York Stock Exchange (NYSE) must both be greater than 2.4% of total NYSE issues traded that day;

•    That the smaller of these numbers is greater than or equal to 75 (75 is 2.4% of 3,126, which is the number of stocks listed on the NYSE);

•    That the NYSE 10-week moving average is rising;

•    That the McLellan Oscillator (a market breadth indicator that evaluates the rate of money leaving or entering the market) is negative on that same day; and

•    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.

Miekka does not claim the Hindenburg Omen as a guarantee of a crash, but says historical data shows that the probability of a downward move greater than 5 per cent occurring after a confirmed Hindenburg Omen is 77 per cent.

“The Hindenburg is like a funnel cloud,” he says. “You never have a tornado without one, but most funnel clouds don’t spawn a tornado.”

Going all the way back to 1978, Miekka says there have been 46 Hindenburg Omens – not counting repeats within 30 days – and only six “notable” market drops: in 1982, 1987, 1990, 1998, 2000 and 2007-2009. All of these were signalled by Omens, which preceded the market low points by 18 to 60 days.

He says the 2007-2009 bear market occurred in stages, with the Hindenburg Omens initiated on 17 October 2007, 5 December 2007, 6 June 2008 and 19 September 2008 each followed by market drops of more than 5% within the following 30 trading days.

“Statistically, 70% cent of Hindenburg Omens that start with a negative McLellan Oscillator have correctly predicted a lower market 30 trading days later,” says Miekka. “Note, however that of 46 Omens since 1978, just 12 preceded significant – over 5% – market drops within 30 trading days, so its ‘winning’ percentage is about 26%.

“However, if I saw a funnel cloud with a 26% chance of becoming a tornado, I’d head for the cellar!” says Miekka. He does not expect a “quick drop” until the McLellan Oscillator falls below +1800, which he says could place the steepest part of the Omen-predicted decline “sometime in September.”

With the Death Cross also having been seen in the US markets in August – and both receiving plenty of publicity – investors are understandably nervous.

“The Hindenburg Omen isn’t 100% cent accurate, but it has preceded every crash since the 1987 crash,” says Clif Droke, editor of the thrice-weekly Momentum Strategies Report and editor of Gold Strategies Review.

“Normally I’d view the extreme publicity given to the Hindenburg Omen and the Death Cross from a contrarian standpoint, and assume that the overcrowded nature of the publicity would act to nullify the negative message of these indicators,” says Droke.  

“However, with a very important stock market cycle – the four-year cycle -scheduled to bottom in late September/early October, these indicators can’t be lightly dismissed.”

Droke says other indicators warning of a potential market decline include the Hi-Lo momentum indicator (HILMO) on the NYSE.  This indicator is constructed by taking the rate of change (momentum) of the cumulative number of stocks making new 52-week highs minus new lows on the NYSE on a daily basis.  

A decline in the new high-new low differential implies diminished demand for stocks, which in turn sets the stage for broad market weakness. Droke says the HILMO turned negative in April this year just before the “Flash Crash” of May 6 (when the Dow Jones suddenly dropped 600 points, only to recover its losses in a few minutes) and has been declining ever since.

China-based Australian technical analyst Daryl Guppy, founder and director of Guppytraders.com, is not so convinced of the ability of the Hindenburg Omen and the Death Cross to foretell the collapse of the US markets.

“The Death Cross is a figment of the imagination of people who know very little about technical analysis: it is sprouted mainly by fundamental analysts who have limited knowledge of charting. And the very fact that the Hindenburg Omen has captured market imagination points the way to important market behaviors – when people are ready to grasp at any straw of negative news, it shows a profound weakness in the market.”

Guppy says it is always important to distinguish between something that may be statistically significant and something that is of trading significance. “The market provides a field of rich pickings for obtuse statistical relationships. There is always a danger of confusing co-incidence with correlation. And correlations do not always have any significance in terms of prediction.”  

“The Hindenburg Omen is index-specific to the NYSE with seemingly exact requirements – 2.2% (Miekka now uses 2.4% of NYSE stocks). Exactitude creates an illusion of reliability in a world of probability and has great emotional appeal. Why not 2.3%?

“This type of exactitude is often a result of statistical curve-fitting and this signals caution. It’s what we call a ‘prima donna’ indicator rather than a robust analysis tool. Prima donna indicators only perform under very specific circumstances; robust analysis tools provide reliable results under a variety of conditions and in a variety of markets.”

Guppy says analysts disagree about the current occurrence of the Hindenburg Omen. “Some say yes based on their data, others say no based on their data. This is always a warning sign for an indicator that is hedged with exactitude. It suggests widespread curve-fitting that is entirely dependent upon an exact data set. In a broader sense, many analysts think this indicator is too index-specific to be particularly useful: there is little evidence that the methodology can be successfully transferred to other indices – which puts the Hindenburg Omen firmly in the camp of co-incidence rather than correlation.”

This is not to dismiss the the Hindenburg Omen, he says; but “like all good technical analysis, the signals from one indicator should be verified using signals from another indicator that measures the same events in a different way.”

Independent Australian technical analyst Regina Meani says that she did notice the Death Cross events in the Australian and US markets, which first occurred in May (see accompanying chart) and June respectively. But she says the problem with the Death Cross (and the Golden Cross) is that they are both trending indicators, and lagging indicators.

 

“In my experience, when a market is moving sideways, you get whipsawing with that: there is a real chance that you can get whipsawing happening and re-crossing, and we’re seeing that in both the Australian and US markets,” she says.

“The ten-week MA on the Dow is under the 30-week MA, but only marginally; and it has chopped back and forward since the first crossing in June. The market is going sideways, and the two MAs had a marginal cross back above on the week of August 6, and now it’s back beneath it. The S&P 500 also had a death cross in June. But really, you can already say that the steep uptrend in the US markets, which we had from the March 2009 low, has broken, so quite frankly you should be out of the market and not doing anything.”

Meani does not believe that the Australian market is in a bear market. “I think we’re in a correction within a very long-term bull market, but there is the chance that we see another wave down, and there is a lot more uncertainty and volatility to come out in this market yet. There is all the political uncertainty as well as the international uncertainty that was already there.”

She thinks the All Ordinaries index could come back to somewhere between 3800-3900. “I won’t be disappointed if it doesn’t go there, but I won’t be surprised if it does. At the moment, it is trying to rise, but it has barriers from 4600-4700, but the main resistance is around 5000. We really need to clear that area before we can say that the way is clear to think about the bull market continuing higher.”

Meani does not think that investors should be relying on the death cross too much. “Yes, it is an indicator that the market is not going up anymore, but in this kind of situation, I wouldn’t say that it’s a precursor of doom,” she says.

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