Whereas the S&P 500 did handle to complete the week above tactical help at 5250, probably the most widely-followed macro technical indicators lately registered an preliminary promote sign for the second time in 2024. Right this moment we’ll clarify the three elements of the Hindenburg Omen, present why this sample is widespread at main market tops, and focus on the extra indicators we might want to look at to substantiate a bearish outlook for the S&P 500 utilizing this highly effective indicator.
The Hindenburg Omen was created and popularized by market strategist Jim Miekka, and relies on three elements that he found have been fairly widespread at main market tops. It is price noting that plenty of totally different variations of the Hindenburg Omen are used within the current day; right here, we’re describing the model used on StockCharts.com.
First, the NYSE Composite Index ($NYA) must be in an uptrend. On this case, we wish to see the 50-day rate-of-change to be larger than zero. This is a crucial first step, as a result of we’re solely searching for a possible market high if the market is already in a longtime uptrend!
The 50-day ROC for the NYSE Composite Index turned constructive in November 2023, quickly after the October 2023 market low. This rate-of-change has remained above zero till simply this week.
Second, there must be a minimum of 2.5% of NYSE members making new 52-week highs and a minimum of 2.5% of NYSE members making new 52-week lows on the identical day. Chances are you’ll preliminary assume that an excessive variety of new highs would suffice, as that will indicate some form of “overbought” market situation. Or maybe an enlargement in new lows would make sense, as a result of then the market would have moved increased with weaker breadth situations.
However Miekka’s evaluation confirmed that market tops are often marked by indecision, and, by searching for a scenario the place there are a wholesome variety of each new 52-week highs and new 52-week lows, we are able to verify this unstable market state. We are able to see within the chart that we noticed 2.5% of latest highs and new lows on the identical day earlier within the month of Could.
One fast word: that is the place totally different charting suppliers have used totally different settings for the Hindenburg Omen, starting from 2.2% to 2.8% of NYSE listings as the edge for this second issue.
Lastly, the McClellan Oscillator wants to show destructive, that’s, break beneath the zero stage. This tactical market breadth indicator relies on the cumulative advance-decline line, and a break beneath zero represents a short-term bearish rotation in breadth situations.
I’ve color-coded this chart inexperienced to focus on constructive breadth and purple for destructive breadth situations over the previous 12 months. Be aware how we lately rotated again beneath the zero stage, offering the ultimate piece of proof for an preliminary studying on the Hindenburg Omen.
So what would make this an entire and confirmed Hindenburg Omen, much like what we have seen a earlier main market tops? It is necessary to look at a second sign inside one month of buying and selling, as Miekka discovered that a number of indicators in a comparatively brief time frame tended to additional validate the indicator.
Right here, I’ve remoted a “composite” indicator that tracks the three elements outlined above. When all three are firing, the indicator reads +3.0. You will discover the sign from final week, in addition to the earlier sign from February 2024. Be aware that we by no means acquired that second confirmatory sign in February, so the Hindenburg Omen was by no means confirmed.
When was the final time we had a legitimate and confirmed Hindenburg Omen? In December 2021, simply earlier than the January 2022 market high, we skilled two units of confirmed elements inside one month. Earlier than that, the subsequent earlier sign was throughout the COVID peak in February 2020!
So whereas this preliminary studying from final week doesn’t absolutely verify a Hindenburg Omen high, it ought to alert traders to be prepared for the draw back that always comes after a confirmed promote sign. And whereas the indicator doesn’t essentially indicate potential draw back targets, a quick historical past lesson of the S&P 500 reveals the earlier indicators have typically preceded main market declines!
RR#6,
Dave
P.S. Able to improve your funding course of? Take a look at my free behavioral investing course!
David Keller, CMT
Chief Market Strategist
StockCharts.com
Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your personal private and monetary scenario, or with out consulting a monetary skilled.
The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer and don’t in any approach symbolize the views or opinions of every other particular person or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders reduce behavioral biases by way of technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness strategies to investor resolution making in his weblog, The Conscious Investor.
David can be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency centered on managing threat by way of market consciousness. He combines the strengths of technical evaluation, behavioral finance, and information visualization to establish funding alternatives and enrich relationships between advisors and shoppers.
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