How to Defeat the Hindenburg Omen

The stock market is a fiery zeppelin crash waiting to happen.

Well, maybe not. But that’s what the financial media coverage of a rather complicated technical indicator would like you to believe.

Everywhere I look, I’m seeing breathless mentions of something called the Hindenburg Omen. Some sources are reporting as many as 11 Hindenburg Omens have materialized just over the past few weeks.

“A Google News search for the term “Hindenburg Omen” returned 6,340 results this weekend, and more than a few dramatic photos of the ill-fated Zeppelin airship,” writes my trading buddy Jonas Elmerraji. “Yup, fear is the predominant emotion in stock investors right now – why else would click-hungry media outlets push some obscure market indicator named after a gruesome disaster?”

On top of the perfectly-named Hindenburg Omen, we experienced a 2% drop in the broad market last week. So conditions are ripe for some new worries.

But aside from its catchy (and terrifying) name, what’s the deal with the Hindenburg Omen?

For starters, if you’ve bothered to read any of the articles that cite the indicator, you’ve probably noticed that none of them really explain what the hell the Hindenburg Omen measures. That’s because it’s incredibly complicated. Fully grasping the Hindenburg Omen requires more than a rudimentary understanding of simple technical analysis techniques.

I’m not even going to bother wasting my time trying to lay it all out for you. I can’t even come up with a simplified explanation beyond the fact that it’s bearish and it involves tallying NYSE advances plus declines and new highs vs. new lows. And that doesn’t even begin to get into the nuances of what’s required to trigger the indicator…

If the Hindenburg Omen had a mundane name, it never would have caught on. Its track record for calling major tops isn’t consistent (Hindenburg Omens made similar headlines in 2010, for example). Most people don’t even know how it works. It looks good in a bearish market story. But it’s not something anyone should use as a trading signal.

It’s no secret that the short-term trend for stocks is lower. The S&P 500 has dropped five out of the last six trading days. So far, we’ve seen a retreat of 3% this month. But if you’re prepared for a bigger correction, the big, scary headlines won’t ruin what has been a solid year for stocks so far.

Maintain appropriate stop losses and sell when they’re triggered. Don’t force any new trades while the market is falling. And don’t blindly sell out of your positions based solely on fear. Keeping a clear mind during a correction (of any magnitude) will put you eight steps ahead of every other investor on the planet.

Regards,

Greg Guenthner
for The Rude Awakening

The Daily Reckoning