Hindenburg Omen flashes early sell signal | a cautious investor

The S&P 500 ended the week above tactical support at 5250, but one of the most popular macro technical indicators recently registered an early sell signal for the second time in 2024. Today I will explain the three components of the Hindenburg. Signs, show why this pattern is common at major market tops, and discuss additional signals to watch for to confirm a bearish outlook for the S&P 500 using this powerful indicator.

The Hindenburg Omen was created and popularized by market strategist Jim Miekka and is based on three factors he discovered are commonly found at the top of major markets. It is worth noting that various versions of the Hindenburg Omen are currently in use. This describes the version used by StockCharts.com.

First, the NYSE Composite Index ($NYA) must be in an upward trend. In this case, we want to determine if the 50-day percent change is greater than zero. This is an important first step because you are only looking for potential market tops if the market is already in an established uptrend!

The 50-day ROC of the NYSE Composite Index turned positive in November 2023, shortly after the October 2023 market low. This rate of change remained above zero until this week.

Second, at least 2.5% of NYSE members must record a new 52-week low on the same day, and at least 2.5% of NYSE members must record a new 52-week low on the same day. At first, you might think that hitting a ton of new highs would be enough because it suggests some kind of “overbought” market situation. Or maybe it makes sense to extend a new low. Because the market will move higher under weaker breadth conditions.

However, Miekka’s analysis shows that market highs are typically indecisive, and looking for situations where both 52-week lows and 52-week lows are both healthy can confirm this volatile market condition. If you look at the chart, you can see that the high and low points increased by 2.5% on the same day in early May.

One quick note: This is where various chart providers have used different settings for the Hindenburg Omen, using a range of 2.2% to 2.8% of the NYSE listing as the threshold for this second factor.

Finally, the McClellan oscillator must turn negative. That is, it must fall below level 0. This tactical market breadth indicator is based on a cumulative bull-bear line, with a break below zero indicating a short-term bearish rotation in breadth terms.

I’ve color-coded this chart with green to highlight positive range conditions over the past 12 months and red to highlight negative range conditions. Notice how we recently rotated below the zero level, providing final proof for the initial reading of the Hindenburg Omen.

So what makes this a complete and unmistakable Hindenburg Omen, similar to what we’ve seen on previous major market tops? Miekka has found that multiple signals in a relatively short period of time tend to further validate the indicator, so it is important to observe a second signal within a month of trading.

Here we have isolated a “composite” indicator that tracks the three components described above. When all three are fired, the indicator shows +3.0. You can check last week’s signals and previous signals for February 2024. In February, the Hindenburg Omen was not confirmed because a second confirmation signal was not received.

When was the last time you saw a valid, confirmed Hindenburg Omen? In December 2021, just before the market high in January 2022, we experienced two identified factors within a month. Before that, the next previous signal was during the Corona peak in February 2020!

So while last week’s early numbers do not fully confirm the Hindenburg Omen high, they should warn investors to prepare for a downturn that often follows confirmed sell signals. And while this indicator doesn’t necessarily imply a potential downside target, a brief history lesson of the S&P 500 shows that previous signals often precede major market declines!

RR#6,

dave

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David Keller, CMT

Chief Market Strategist

StockCharts.com

disclaimer: This blog is written for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.

The author had no positions in any securities mentioned at the time of publication. All opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.