The Great Plunge is Coming

Are you ready for the next stock-market crash of the century? The Hindenburg Omen was spotted by eagle eyes on April 15th. It was confirmed by a sighting on May 29th. That gives us 40 days approximately before the market takes a plunge (apparently). That’s enough to spark fears on the market that we are in for a shaky time, but are those fears really justified and will the market plunge as the Hindenburg Omen predicts?

The Hindenburg is a technical analysis pattern that predicts highs and lows of the stock market based upon Norman G. Fosback’s High Low Logic Index (HLLI). It was invented by Jim Miekka in 1995. It’s used as a way of predicting big turndowns.

The Hindenburg has to meet four criteria and it is calculated using Wall Street Journal figures daily.

1. The sum of new 52-week highs and the sum of new 52-week lows must be equal or greater to 2.8% of the sum of NYSE issues advancing or declining on any given day.

2.  NYSE must be greater in terms of value than it was 50 days beforehand.

3. The McClellan Oscillator (money entering and leaving the market) must be negative on that day also (in other words, below zero equals a bearish market).

4. The 52-week highs must not be more than twice the 52-week lows (but the opposite does not hold).

The two sightings mean that the Hindenburg Omen has met the criteria.

There’s no point in my telling you that the market is not a science. The Hindenburg Omen tries to turn it into probability. But zero probability doesn’t exist as a zero. If it were zero, then it would be impossible. Zero improbability in Bayesian terms is just the measurement of probability as an indicator of confidence and belief in the market. You can predict as much as you like until the prediction doesn’t work. It’s human nature to want to try to find out before what will happen actually happens, but that we all know is impossible to do down to a T.

But, the last time the Hindenburg Omen caused nose-twitchy reactions and people running for the white-rabbit feet or other such lucky amulets fearing a drop in the market there was great talk of the Federal Reserve and fretting over their policies. That was back in August 2010 and it was Ben Bernanke’s QE statement that saved the day (maybe).

The same thing is going on now on the jittery market, with the fear that the US Federal Reserve’s pulling the plugs on bond-buying programs on the market will lead to a decline. But, can we really believe in the hocus-pocus, waving of the magic wand business that the Hindenburg Omen will come true? I could list a thousand omens that we should be wary of (according to some). But, I’m weary of living in the pseudo Middle Ages. It’s not the prediction of the Hindenburg that is going to trip the market up and make it fall flat on its face. If that happens, it will be down to something else.

The Dow Jones 17 months out of the last 20. That’s the longest steam ahead since 1951. Shouldn’t we be looking at other indicators rather than one that tries to predict the future? A 17-month rise is bound to come to an end at some time. If the unemployment figures released on Friday are better than expected, that could mean the Federal Reserve might take some drastic decisions. It’s that which might be worrying the market rather than the Hindenburg Omen.

To a certain extent it works, but if it worked every time, we wouldn’t be playing the market and we wouldn’t be sitting here surrounded by recession in the world at the moment. We would be living it up. The Hindenburg Omen is nothing more than a zeppelin of the past, which is not likely to work at all.

Although having said that, it has only got the market wrong twice out of all (and that’s a total of 8%) 25 sightings. But, it failed to spot the mild declines. Anything can work if we believe in it. We can arrange the data in any way we want to make it fit in with the requirements. Mild Hindenburg, strong Hindenburg, no Hindenburg. So you decide. It comes to something when we start trying to predict the market with a German commercial passenger-carrying airship. By the way, its crash remained a mystery for seventy-odd years until someone came along and gave the right explanation.

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