Value of Perfect Information

Some time ago, we created an indicator that we call the C-RSI.  Actually, it is a zero based version of the common Relative Strength indicator.

We zero based it because that quickly and instantly show’s you if an underlying security’s strength is positive of negative, and how that strength is trending.

This morning, we will take a look at what it show’s for the S&P 500 …

From August to the very beginning of October, the S&P 500 fell and made a lower low.   This concerned many investors, but the C-RSI showed a strong positive strength divergence at the same time.

The result?  The S&P 500 bolted to the upside until the end of October where it peaked and moved lower since that time.  (See the chart below for the above described conditions.)

So, what is the C-RSI showing now?   Well, it has a Negative reading of -1.6 which means that the S&P 500 is in a “Danger Condition”.  It is also trending down, which is a deteriorating condition.

What is the smart thing for someone to do when the market is in this condition?   Stay out of it, until you see Strength (the C-RSI) start to trend up, and then go positive.

Click here to find out more about StockTiming.com’s C-RSI Indicator Chart.

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Back from vacation, where the weather was as volatile as the stock market, I was happy to see little damage to my DITM covered call strategy, made whole by today’s rally. Although the VIX came off the 4 handle down to 36, the CBOE equity put/call ratio zoomed up to 74 – good for the market (as we saw today). NYSE new highs to lows were an incredible 33 to 1,296; 23/947 on the OTC. Both newsletter surveys – Inv.Intell. and AAII remained inverted, with more Bears. Insider selling to buying was a lowly 3:1 ratio. Money actually went into MMFs for the first time in a month; monthly data on ETFs showed money coming out of equity and international funds -level in bonds. The 2010 support level on the SPX (S&P500) held at 1100 -now trying to break resistance at 1200.

What should be on your Radar Screen next?

The large drop in the market was not a surprise to our (StockTiming.com) paid subscribers because we issued a Special Report on May 16th. showing why a “precipitous drop” was coming soon.   At that time, we also commented on what I would have told my father if he was still alive, and we concluded the report with the following paragraph on May 16th:

“No one knows for sure, but things could be lining up for what could be a perfect storm. These are risk levels that no one should be exposed to right now.   My Dad passed away last month at 93, but if you were to ask me what I would have told him now … I would tell him to Get Out of the market right now.  So, that is my advice right now, given the total picture we are seeing.   Be safe now and go to cash …  we can always move back in and buy  later if things turn out okay and get better. But for now, I am going to recommend Selling at the open this morning and going to cash.  (Posted on May 16, 2011 on StockTiming.com’s Standard Update.)”

So, we did have that  big drop … what now?

Be sure to come back tomorrow when we will tell you what you “What you should have on your Radar Screen now“.

Marty Chenard

You can make a ton of money trading the market. Trading can be very short-term (one or two days), short-term (1 to 4 weeks) or longer. Trading one week or longer involves market timing. The key to making money is knowing when to buy, what instrument to trade in, and when to sell. This article will discuss all three, but focuses primarily on trading in a one to four week time frame.

A 3 to 5 percent move in stocks can produce returns of 20 to 100 percent or more in the options markets. Trading options is best conducted using no more than a 4 week time frame because the time premium built into the price of options works against the price gain you are realizing from a move in the markets. When trading options, the key is when to get in, making sure when you get in when there is a 3 to 5 percent move coming, and when to get out before the trend (even a corrective counter move) occurs, which can eat up all your profits very fast. Trading options requires having access to terrific momentum measure indicators. The problem with Full Stochastic, RSI and MACD Momentum indicators is that they can stay overbought or oversold for a long time, and if you rely upon them for entry, you may be getting in far too soon. They do provide nice early warning background, a get “ready signal” for when to enter. However, you need a trigger indicator that won’t get faked out when a new trend that can be traded for profit is starting.

We have found that the best indicator as a trigger to enter a trade is our own Purchasing Power Indicator. It has done a remarkable job identifying high probability 1 to 4 week trend turns that result in 3 to 5 percent moves, enough to make a nice profit on an options trade. This indicator is a stock market indicator we present to subscribers every night in our market newsletters at www.technicalindicatorindex.com. While it is not perfect, it is very good. The following chart and tables show its performance since March 2009, when the current Bull Market started.

Since it triggered a new buy signal on June 21st, 2011, which appeared to many to come out of the blue, but this indicator is smart, a cold calculation of market internal data and momentum, since this buy signal on June 21st, the Industrials have risen 406 points, 3.3 percent. It saw this past week’s mega rally coming before pretty much everyone. All was doom and gloom when our PPI generated a new buy signal that proved prescient once again.

The beauty of short-term market timing trading is you get opportunities to make money during the impulsive stock market moves in the direction of the primary long-term trend, but also you get to play the better corrective counter-trend moves as well. You can make money whether stocks go up or down. Given the normal cycle of market moves, there could be as many as 20 or 30 moves of 3 to 5 percent per year! That is a lot of trading opportunity that buy and hold completely misses.

We also have another terrific stock trend turn indicator that is excellent at identifying tradable trend turns. It is call our Secondary Trend Indicator, which we present every night in our market forecasting newsletters. This indicator generated a new buy signal on June 17th, telling us the June 15th market low was going to stick. Since that buy signal, the Dow Industrials have risen 592 points, or 5.0 percent. These are the kinds of tools that market timing traders can use to make a lot of money!

Performance of Our Purchasing Power Indicator Buy Signals
from March 2009 through June 2011

Performance of Our Purchasing Power Indicator Sell Signals
from March 2009 through June 2011

Times are tough right now. Making money is important. Protecting money is important. Being aggressive with a small budget of funds you are willing to take a chance with, and trade, requires discipline and a willingness to lose money from time to time, but can be very beneficial.

We have a Platinum Trading Service at www.technicalindicatorindex.com where we do the trading with our own money, in real time, that subscribers can follow along with, for either educational purposes, or for ideas to do their own market timing trading within 15 minutes of when we trade.

A trader can make a lot of money without risking a lot of money. By buying Call or Put options long, our loss risk is limited to the amount of money we invest in the options. In our Platinum Trading Service, for the first 6 months of 2011 we limited risk to an average trade of ½ percent of our total portfolio capital, and were able to gain a return on that investment of 282 percent – in just the first six months of 2011. If you had $25,000 of risk capital, that could have been turned into $70,000 in six months using our Platinum Trading Service. That is a nice return with the only downside risk being ½ or one percent of one’s portfolio. Past performance is no guarantee of future performance, but the point is, the Purchasing Power Indicator, used in connection with other momentum indicators we follow, resulted in terrific results with minimum risk.

If someone did not want to join our Platinum Trading Service, did not need the hand holding, they could simply use our Purchasing Power Indicator and other indicators of their own choosing to conduct trades themselves in either the options market, or another market which also presents terrific opportunities for market timing traders:

The leveraged ETF market allows someone to enter a position with trading funds and enjoy a move that is two or even three times the move that the S&P 500, the Dow Industrials, or any other stock index one is playing moves without being in the options market where there is an expiration date. For simple educational purposes (I am not selling or recommending these ETFs, you must do your own due diligence) the following ETF’s offer leveraging opportunities to play these three markets to decline:

SDOW Ultra Pro Short Dow 30 Industrials (Leveraged Targets 300 % Daily Move)
SPXU Ultra Pro Short S&P 500 (Leveraged Targets 300 % Daily Move)
SQQQ Ultra Pro Short QQQ NASDAQ 100 (Leveraged Targets 300 % Daily Move)

And, if you want to play these markets to rally, but want to see your investment move three times as the stock index moves, here are three ETFs to consider:

UDOW Ultra Pro Dow 30 Industrials (Leveraged ETF Targeting 300% Daily Move)
UPRO Ultra Pro S&P 500 3X (Leveraged ETF Targeting 300% of Daily Move)
TQQQ Ultra Pro QQQ NDX 100 3X (Leveraged ETF Targeting 300% of Daily Move)

Not all trades are winners, but we have found that by limiting the amount invested, and using reliable (not perfect but right more than wrong) momentum trend turn indicators such as our Purchasing Power Indicator, the gains exceed the losses over time, and the net result of return on investment is pretty darned good.

Successful trading not only takes discipline to wait for signal changes to enter, and discipline to limit the amount invested to an amount we can afford to lose, but it also requires knowing when to sell, to either take losses on a losing trade and get out, or when to take a profit on a winning trade. Exiting is in the eye of the beholder, depending upon the trader’s risk appetite, experience, and financial position. We like to set a goal, and once that profit goal is achieved, to grab the money and run. You will never lose money taking profits. The temptation is always to get greedy, and stay in too long. This is where judgment, experience, and discipline help a lot. Are you happy with a 20 percent profit in an options trade? A 50 percent profit? Not may trades go to 100 percent, but some do. That decision requires a gut check. We like to sell at the sleep-at-night level. Certainly market conditions play a part, but the best read on a market can go sour fast with news events or a fast turn in market psychology. Some people like to enter when we get a new buy or sell signal in our Purchasing Power Indicator and then sell when certain reliable momentum indicators approach overbought or oversold in the direction of the trade.

We offer you the option of calling your own shots at www.technicalindicatorindex.com or plugging into our thoughts and following along with our Platinum Trading Service. The decision is up to you.

We cover a host of indicators and patterns, and present charts for most major markets in our International and U.S. Market reports, available to subscribers at www.technicalindicatorindex.com

If you would like to follow us as we analyze precious metals, mining stocks, and major stock market indices around the globe, you can get a Free 30 day trial subscription by going to www.technicalindicatorindex.com and clicking on the Free Trial button at the upper right of the home page. We prepare daily and expanded weekend reports, and also offer mid-day market updates 3 to 4 times a week for our subscribers.

“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

According to Dow theory, once confirmed, the trend is considered to be in force until it is authoritatively reversed by a joint movement above or below the previous secondary high or low points. In bull markets a joint move by the averages below the previous secondary low points is required to reverse the bullish trend and in bear markets a joint move above the previous secondary high points is required. It is not a requirement of Dow theory that these movements occur on the same day. But, when one average fails to confirm the movement of another average, above or below a previous secondary high or low point, a Dow theory non-confirmation is born.

Non-confirmations typically do occur at major trend reversals, but at the same time a non-confirmation can exist for a period of time, only to be corrected at a later date as the averages eventually confirm one another. Thus, these non-confirmations do not always mean that a trend change is inevitable, but they do serve as warnings. The key with Dow theory comes from having enough experience and understanding of Dow theory, which comes largely from studying the works of our Dow theory founding fathers as a basis, to understand what constitutes a secondary high or low point.

Anyway, as the averages pushed into the secular bull market top in 2007, a Dow theory non-confirmation began to take root. Both averages pushed into joint highs in July 2007. It was then from that high that the averages both declined into their August 2007 secondary low points and at that point they were in gear with each other. From the August 2007 secondary low points, a new secondary movement began and it was from that low that the Industrials moved to its all time closing high on October 9, 2007 at 14,164.53. However, the Transports, failed to confirm this move and from that non-confirmation both averages moved down into their next secondary low point, which occurred in January 2008 for the Transports and in March 2008 for the Industrials. It was the decline below the August secondary low points that occurred in November 2007, on the way down that served to authoritatively reverse the previous primary bullish trend by giving us a Dow theory bearish trend confirmation.

Note on the chart below that the decline into the January/March 2008 secondary low point created a downside non-confirmation. It was then from these secondary low points that the movement into the next secondary high began. This time, the Transports moved to a new all time high on June 5, 2008 at 5,492.95. However, because the Industrials failed to confirm, with a joint movement above their previous secondary high point, the previously established bearish primary trend remained intact and another upside non-confirmation was formed.

Moving forward to today, we have a situation in which the Transports have moved to another all time high, while the Industrials have not. This can be seen in the chart above. It seems that many are erroneously referring to this as a long-term Dow theory non-confirmation, which allegedly has some dire consequences. This is not true. The fact that the Transports have moved above their previous all time high, which occurred in 2008, while the Industrials have not moved above their 2007 all time high, is of no consequence in accordance with Dow theory. This does not constitute a legitimate Dow theory non-confirmation. With Dow theory, it is the joint movement above or below previous secondary high and low points that is important and not a previous high or low point from some 3 years prior. As the averaged topped in 2007 and 2008, this was the case. Also, this is occurring after the decline into the 2009 Phase I low.

From a current Dow theory perspective it is the joint close above the recent secondary high point that served to reconfirm the existing bullish primary trend change, which has been in effect since July 2009 as the averages began moving up out of the Phase I low. Now, that said, it is important to also understand that this bullish primary advance is occurring within the context of what still appears to be a longer-term secular bear market. In accordance with Dow theory, bull and bear markets unfold in three phases with important counter-trend movements separating these three phases. According to the longer-term phasing aspects of Dow theory, the rally that began at the 2009 low should prove to be the rally separating Phase I from Phase II of this longer-term secular bear market. Thus, my longer-term bearish view has not changed. But, the point to this article is to clarify that the fact the Transports have moved to an all time high while the Industrials have not does not constitute a legitimate Dow theory non-confirmation and to draw the conclusion that it has some longer-term meaning in accordance with orthodox Dow theory is wrong. The longer-term warning in accordance with Dow theory comes from the Phasing aspects and not this alleged “non-confirmation.”

In order to give the longer-term perspective on this phasing, I have also included a chart of the 1966 to 1974 secular bear market below. It was the decline out of the 1966 top into the 1966 low that marked the Phase I decline during this period. The 26 month rally that followed into the 1968 top was the rally separating Phase I from Phase II and the decline from late 1968 into1970 marked the Phase II decline. The rally from mid-1970 into January 1973 was the rally separating Phase II from Phase III and the decline from January 1973 into the 1974 low was the final Phase III decline. I think that our current situation is synonymous with the 1966 to 1968 period. Again, it is the phasing aspect of Dow theory that has longer-term negative consequences for the market. I have identified very specific traits, which I refer to as DNA Markers, that have occurred at every major top since the inception of the averages in 1896 and these details are covered in my research letters. Once the DNA Markers properly present themselves, the Phase II top will be at hand. I warned of these DNA Markers as the markets moved into the 2007 top. Some listened and some did not. I hope you are listening this time.

I have begun doing free market commentary that is available at www.cyclesman.net The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical-based analysis plus updates 3 times a week.

This time of year you will here a lot of people talking about faith.

In the currency markets it is all about “full faith and credit”, in the central bank, in the government backstopping.  In the case of the European central bank it is the full faith in the principle backstopping.  The commitment to a sound currency.  This is the rationale behind the exodus into Europe.  That, no matter how many PIGS the Germans try to throw on the tracks, the ECB rate hike machine will plow ahead.

A massive short dollar trade came out of Asia on 4/20 -see “breakaway gap?” lower in UUP (below):  This ignited the ‘Carry Trade’ into hard assets worldwide.  Most commentators missed the point of the rally completely and no one challenged them.  QUESTION:  Why would oil rise $3.00 back to our top target of $112/$114 when the conflict in Libya is winding down – When Saudi Arabia says no demand in sight for additional oil – when IEA officials promise more oil on the way by June   .   BECAUSE OIL IS PRICED IN DOLLARS!

Faith!

As I alluded to in ‘Sympathy for the Dollar’ traders have faith that the US central bank, Treasury, powers that be, have opted for hyper-stagflation vs. deflationary recession as they drive the dollar lower, punishing international bondholders.  This could get ugly!

I have faith also.  Faith in human nature.  Faith in traders resolve.  With the Dollar Index approaching all-time lows last seen just over eleven hundred days ago, I have faith that traders will challenge that mark (closing low of 71.67 set on 3/24/08) before the sun sets many more times.  Then Mr. Geithner will face his own Waterloo moment.  Will he let the dollar go quietly into that goodnight?  Is Dollar Index @ 65 the ‘New normal’?  Someone find out which side of the trade Mr. Soros is on, he’s been too quite lately.

One of my favorite quotes from one of my favorite actors:  “I can’t see it yet but It’s coming very close now!” Max von Sydow -Dune.

Part II:  The NYSE’s New Lows indicator …

Last week, we discussed how the NYSE “New Lows” related to the market and panic selling behaviors.

Last Wednesday, we commented on how the New Lows should be below a daily reading of 28 for healthy market conditions.

We had commented that a rise above 28 should be a red flag for investors to start being more observant of what is happening in other market areas such as technical indicators and/or changes in underlying fundamentals.

When you get close to a level of 28, you could be seeing elevated worry levels, but it generally isn’t until the New Lows go above a level of 50 that panic selling activity starts.

Last Wednesday, the New Lows were still at a healthy level of 10.   But, yesterday was perceived as a scary market day by many … so what happened to the level of  NYSE New Lows?

Take a quick look at today’s chart for the answer.   As you can see, the New Lows came in at a healthy level of 14 yesterday.   That was higher than last week’s level of 10, but not enough to raise a red flag.   So, in spite of a scary looking  day yesterday, the New Lows are not indicating elevated worry or panic levels that should be of concern at this time.

However, as we commented last week … “you may want to consider watching the NYSE’s New Lows more often as this current rally gets progressively older.

This weekend, we would like to focus on the performance of our Secondary Trend Indicator. The origin of this indicator is the name of our website, Technical Indicator Index. When we first started publishing our research and newsletters, back in 2003, we came up with a basket of indicators which we believed in combination would be a useful trend analysis tool, confirming whether or not current trends were significant, and identifying when new multi-week trends were beginning. It was a short-term/intermediate-term trend-finding indicator. We made modifications to which components deserved to be part of that Index and changed its name to our Secondary Trend Indicator in 2005. We have been presenting this indicator for five years in our newsletters using the same component formula that entire time. The components have remained the same since 2005 because this indicator works. It is time this amazing indicator gets more attention.

While our Secondary Trend Indicator is not one of what we call our “key trend-finder” indicators, it is an independent indicator that can be used to confirm the signals we get from our “key trend-finder” indicators. The STI caught most of the significant trends over the past five years. There were a few false signals, but they quickly reversed and caught the next significant trend.

What is our Secondary Trend Indicator? We have identified 8 statistics or indicators that we believe in combination are critical to the underlying strength or weakness of a market trend. Very simply, we assign a value of positive 1, negative 1, or zero to each of these 8 statistics/indicators every night. We total the results and assign that day’s summation to a running accumulation of every day’s results. Then we subtract from this accumulation a moving average of these summation figures and the difference is our Secondary Trend Indicator. We report this every day in our newsletter to subscribers. For example, for Friday, January 28th, our STI fell 8 points, close to the maximum move that is possible to occur on any given day. We subtracted that from Thursday’s accumulated summation and arrived at our Secondary Trend Indicator reading of positive + 13 as of Friday night. STI readings above zero are buys and STI readings below zero are sells. Simple.

This Secondary Trend Indicator is designed to find investable trends that last anywhere from several days to several weeks, and on occasion, several months. This identifies the trends up and down within the larger Primary Trend. Our Primary Trend Indicator is presented after the end of each month, and our other Primary Long Term trend indicator we follow, Dow Theory Buy and Sell Signals, are reported when they occur. Our proprietary Primary Trend Indicator generated a new Buy signal May 31st, 2010, and since that large degree buy signal, the Industrials have risen 1,883 points, or 18.6 percent.

So, within the Primary Trend, which is identified by our Primary Trend Indicator, we have Secondary trends. Long term investors can take long-term positions based upon the Primary Trend Indicator, and intermediate-term traders/investors can conduct market-timed transactions based upon either the Secondary Trend Indicator or our key trend-finder indicators, or both. Our Platinum Trading Service will use these and several other indicators which we have found make excellent filters to keep us on the right side of high momentum trends, leveraging the amount of trading capital at risk into strong returns.

Currently, both the PTI and STI are on buy signals, but with the STI deteriorating, however our key trend-finder indicators have just moved to a sell signal. So, a short-term to intermediate-term investor could be getting ready to move to a short position (or move to cash and stay out of the market if conservative), or perhaps take a light short or light exiting position now, and then move into a heavier short or exiting position once the Secondary Trend Indicator confirms the key indicator sell signal with a sell signal of its own. The best time to enter is right after new signals are generated. Jumping in after these signals have been in place for a while has more risk because every trend has time limitations, and the more time that has passed, the more likely the trend is maturing. The Demand Power/Supply Pressure Indicator shown in a chart on page one of every newsletter is yet another short-to-intermediate term trend indicator that should add confidence to the trend at hand, and to trend turns. It is very nice when the Secondary Trend Indicator, the key trend-finder indicators (all three, the Purchasing Power Indicator, the 30 Day Stochastic, and the 14 Day Stochastic), and the Demand Power/Supply Pressure indicators are all in agreement. We got a new exit long positions signal in the DP/SP indicator Friday, so that is now deteriorating also.

These indicators should be the primary focus of investors and traders using our service. But while these are the objective signals we follow, we also pay attention to studies that give big picture guidance of over-the-horizon risks. Elliott Wave analysis, RSI, MACD, and Full Stochastics, pattern analysis, cycle turn analysis such as phi mate turn dates and Bradley model turn dates, as well as unique developments such as the Hindenburg Omen provide satellite maps of potential market storms and clearings approaching, beyond the vision of our trading/investing indicators. To invest or trade off of these over-the-horizon tools is usually a mistake, especially if the positions taken are in conflict with the STI, DP/SP, or key trend-finder indicators.

Here are the results of our Secondary Trend Indicator over the past five years in the chart that follows:

The chart shows the initial date of a new signal, either buy or sell, in our Secondary Trend Indicator, then measures the price move in the S&P 500 in the direction of that signal to the date the trend ended. You can see this indicator found a ton of S&P 500 price movement for most of the significant trends over the past five years. There were occasions when a false signal was generated (which are not included in this chart but occurred between ending and beginning trend dates shown), but in those instances, that signal was quickly reversed. But once a meaningful trend started, this indicator was on board very soon thereafter and rode it most of the way.

The Secondary Trend Indicator is a momentum indicator, just like our key trend-finder indicators (the Purchasing Power Indicator, 30 Day Stochastic, and 14 Day Stochastic) and Demand Power / Supply Pressure Indicators are. We believe strongly that momentum rules markets, thus traders and market timing investors should include momentum indicators in their transaction decision-making process. Momentum catches the powerful mass psychological mood of market participants as well as the unexpected deep pockets intervention that can seem to move markets in bizarre ways and come out of nowhere. Because the STI is a momentum indicator, it will remain on the same signal for a short period of time (usually a few days) after a trend had ended and a new trend is starting. That is because it simply needs the time to gauge when momentum has turned in a powerful way in the opposite direction, versus the possibility that a trend-turn is weak, is a fake-out, and not deserving of a signal change.

But here is what is exciting about this particular indicator. If you were not smart enough to know precisely when the apex of the move occurred, if you were not clairvoyant, and you rode this STI until it changed its signal, you still were able to capture a significant number of S&P 500 points most of the time. In other words, it provides an exit signal, albeit coming slightly after the trend has concluded. In a perfect world, exits come at the furthest point of a trend’s move, however that is very difficult to pinpoint most of the time. Exiting is in the eye of the beholder, dependent upon risk appetite, experience, and financial position. Some traders/market-timers exit based upon achievement of a targeted profit level. Others raise stops, hope they do not get stopped out (usually do, more often than not when least desired on a whiplash move) until greater profits are realized, while others ride an indicator until it changes its signal. The problem with the last approach, riding an indicator, is you can lose all your profits if the market turns faster than the signal does. So, if the decision is to ride an indicator and exit on a signal change, that indicator needs to be highly sensitive to a developing trend change. In our experience, most indicators flunk that test. However, based upon the results of the past five years, interestingly, the STI has done a fairly good job of providing a ride’em cowboy exit signal. Not perfect, but the furthermost column on the right shows those results, which are not bad in most cases. We are not recommending any particular exit strategy, as again, that is up to the trader/market-timer and their financial advisor. But we did want you to have the information on this STI for you to consider in your transaction decision-making.

If this is all too much for you, we consider the performance of the Secondary Trend Indicator, our Blue Chip key trend-finder indicators, our Demand Power/Supply Pressure indicators and certain relevant backdrop indicators and market patterns in our new Platinum Trading Service, now available at www.technicalindicatorindex.com.

Over-the-horizon, we remain on high alert based upon Elliott Wave count, phi mate turn dates, Daily, Weekly and Monthly Full Stochastics, contrary readings from overly Bullish investor and advisor sentiment readings, Bearish Divergences between the 10 day average Advance/Decline Line Indicators for the NYSE, NDX and RUT versus prices, a confirmed Hindenburg Omen from December on the clock, and pattern. This is a high risk Bearish set up. Once momentum turns down sufficiently to trigger our STI and key trend-finder indicators, we will be convinced a multi-week decline has started.

We recommend that trial subscribers visit our Glossary button at the left of the home page, as well as our other Guest Articles, especially the article regarding our Primary Trend Indicator, which is a major component of our “key trend-finder” indicator.

Check out our Standard Subscription Specials at the Subscribe Today button at www.technicalindicatorindex.com.

We cover a host of indicators and patterns, and present charts for most major markets in our International and U.S. Market reports, available to subscribers at www.technicalindicatorindex.com

If you would like to follow us as we analyze precious metals, mining stocks, and major stock market indices around the globe, you can get a Free 30 day trial subscription by going to www.technicalindicatorindex.com and clicking on the Free Trial button at the upper right of the home page. We prepare daily and expanded weekend reports, and also offer mid-day market updates 3 to 4 times a week for our subscribers.

“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

So what is a Hindenburg Omen? It is the alignment of several technical factors that measure the underlying condition of the stock market — specifically the NYSE — such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. This Omen has appeared before all of the stock market crashes, or panic events, of the past 25 years. All of them. No panic sell-off (greater than 15 percent) occurred over the past 25 years without the presence of a Hindenburg Omen. Another way of looking at it is, without a confirmed Hindenburg Omen, we are pretty safe. But we have an official Hindenburg Omen as of August 20th, 2010.

We got a second official confirmed Hindenburg Omen observation Wednesday, December 15th, 2010 after getting a first observation Tuesday, December 14th, 2010, meaning we are now on the clock watching for a stock market crash, and at the very least a significant decline. There is a much higher than normal probability of a stock market crash starting sometime over the next four months. All criteria were met Tuesday and Wednesday, December 14th and 15th, 2010. December 14th’s observation saw 179 NYSE New 52 Week Highs, and 113 NYSE New 52 Week Lows according to the Wall Street Journal, the lower of the two coming in at 3.58 percent, above the 2.2 percent threshold required for a Hindenburg Omen observation. Total NYSE issues traded were 3,158. New Highs were not more than twice New Lows, the McClellan Oscillator was negative at negative -16.23, and the 10 Week Moving Average is rising. The second observation on December 15thth has occurred within the required 36 day period necessary for a cluster (two or more observations) to occur. December 15th’s observation saw 156 NYSE New 52 Week Highs, and 89 NYSE New 52 Week Lows according to the Wall Street Journal, the lower of the two coming in at 2.83 percent, above the 2.2 percent threshold required for a Hindenburg Omen observation. Total NYSE issues traded were 3,143. New Highs were not more than twice New Lows, the McClellan Oscillator was negative at negative -68.80, and the 10 Week Moving Average is rising.

Now that we have a second observation, we have an official confirmed Hindenburg Omen. This is the first Hindenburg Omen since August 2010, and only the second since 2008, which of course led to the massive stock market crash in the autumn 2008, and the fourth since the Bear Market started in 2007 (we got one in 2007, one in 2008 and two here in 2010). We got crashes after both the October 2007 and June 2008 Hindenburg Omens.

The way Peter Eliades put it in his Daily Update, September 21, 2005 (www.stockcycles.com), “The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows — but not both.” When both new highs and new lows are large, “it indicates the market is undergoing a period of extreme divergence — many stocks establishing new highs and many setting new lows as well. Such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn’t matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs. This is the condition that leads to important market bottoms.”

A brief history on the origin and evolution of the Hindenburg Omen signal: It was originally adopted by Jim Miekka, editor and publisher of The Sudbury Bull and Bear Report, derived from a New High – New Low indicator developed by Gerald Appel many years ago. Because it signals the possibility of a stock market crash, my good friend, the late Kennedy Gammage, a terrific technical analyst in his own right, dubbed it the Hindenburg Omen after the famous ill-fated aircraft associated with the word “crash.”

How has this signal performed over the past 25 years, since 1985? The traditional definition of a Hindenburg Omen is that the daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day. However, this is just condition number one. The traditional definition had two more filters: That the NYSE 10 Week Moving Average is also Rising, which we consider met if it is higher than the level at any time during the previous 10 weeks (condition # 2), and that the McClellan Oscillator is negative on that same day (condition # 3). We calculate these measures each evening at www.technicalindicatorindex.com using Wall Street Journal figures for consistency. We consider the Wall Street Journal’s data as “official.” Critics have taken this Hindenburg Omen definition and pointed rightly to several failed Omens. But if we add two more filters, our proprietary research finds that the correlation to subsequent severe stock market declines is remarkable. Condition # 4 requires that New 52 Week NYSE Highs cannot be more than twice New 52 Week Lows, however it is okay for New 52 Week Lows to be more than double New 52 Week Highs. Our research found that there were two incidences where the first three conditions existed, but New Highs were more than double New Lows, and no market decline resulted. There were no instances noted where if 52 Week Highs were more than double New Lows, while the first three conditions were met, that a severe decline followed. So condition # 4 becomes a critical defining component.

The fifth condition we found important for high correlation is that for a confirmed Hindenburg Omen, in other words for it to be “official,” there must be more than one signal within a 36 day period, i.e., there must be a cluster of Hindenburg Omens (defined as two or more) to substantially increase the probability of a coming stock market plunge. Our research noted eight instances over the past 25 years — using the first four conditions — where there was just one isolated Hindenburg Omen signal over a thirty-six day period. In seven of the eight instances, no sharp declines followed. In only one instance did a sharp subsequent sell-off occur based upon a non-cluster single Omen, but in that case it was incredibly close to having a cluster of two Omens as the previous day’s McClellan Oscillator just missed being negative by a few points. We included this instance in our data that follows.

So to recap, we have an unconfirmed Hindenburg Omen if the first four conditions are met, but the fifth is not — in other words we only have one signal within a 36 day period. Once a second or more Omen occurs, we then have a confirmed Hindenburg Omen signal with substantially higher odds that a subsequent stock market plunge is coming.

Our research noted that plunges can occur as soon as the next day, or as far into the future as four months. In either case, the warning is useful. It just means, if you want to play the short side after a confirmed signal, or move out of harms way, you must be prepared to see it happen as soon as the next day, or four months from now, possibly after you forgot about it. About half occurred within 41 days.

Based upon the five parameters noted above, here’s what we found: Confirmed Hindenburg Omens are very rare. There have been only 28 confirmed Hindenburg Omen signals over the past 25 years. December 2010′s is the 29th. This is amazing when you consider that during that time span, there were roughly 6,400 trading days. Of those 6,400 trading days where it was possible to generate a confirmed official Hindenburg Omen, only 197 (3.1 percent) generated one, clustering into 28 confirmed potential stock market crash signals.

If we define a crash as a 15% decline, of the previous 28 confirmed Hindenburg Omen signals, eight (28.5 percent ) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes. Three (10.7 percent) more were followed by stock market selling panics (10% to 14.9% declines). Four more (14.3 percent) resulted in sharp declines (8% to 9.9% drops). Six (21.4 percent) were followed by meaningful declines (5% to 7.9%), five (17.8 percent) saw mild declines (2.0% to 4.9%), and two (7.1 percent) were failures, with subsequent declines of 2.0% or less. Put another way, there is a 28 percent probability that a stock market crash — the big one — will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen. There is a 39.2 percent probability that at least a panic sell-off will occur. There is a 53.5 percent probability that a sharp decline greater than 8.0 % will occur, and there is a 74.9 percent probability that a stock market decline of at least 5 percent will occur. Only one out of roughly 14 times will this signal fail.

All the biggies over the past 25 years were preceded and identified by this signal (as defined with our five conditions). It was on the clock just before the stock market crash of the autumn of 2008. It was present and accounted for a few weeks before the stock market crash of 1987, was there three trading days before the mini crash panic of October 1989, showed up at the start of the 1990 recession, warned about trouble a few weeks prior to the L.T.C.M and Asian crises of 1998, announced that all was not right with the world after Y2K, telling us early 2000 was going to see a precipitous decline. The Hindenburg Omen gave us a three month heads-up on 9/11 (2001), and told us we would see panic selling into an October 2002 low, warned in October 2007 that a multi-month 16 percent plunge was about to start, from the DJIA’s all-time high. And it was on the clock three months before the stock market crash of the autumn 2008 into spring 2009 that wiped out 47.3 percent of the stock market’s value. Our subscribers at www.technicalindicatorindex.com were informed immediately as these signals were generated.

Here’s the data for all Hindenburg Omens over the past 25 years:

Date of first Hindenburg Omen Signal	# of Signals In Cluster	DJIA Subsequent % Decline	Time Until Decline Bottomed
12/14/2010	2	Watching	Watching
8/12/2020	6	3.7%	15 days
6/6/2008	6	47.3%	276 days
10/16/2007	9	16.3%	99 days
6/13/2007	8	7.1%	64 days
4/7/2006	9	7.0%	34 days
9/21/2005 (1)	5	2.2%	22 days
4/13/2004 (2)	5	5.4%	30 days
6/20/2002	5	15.8%	30 days
6/20/2002	5	23.9%	112 days
6/20/2001	2	25.5%	93 days
3/12/2001	4	11.4%	11 days
9/15/2000	9	12.4%	33 days
7/26/2000	3	9.0%	83 days
1/24/2000	6	16.4%	44 days
6/15/1999	2	6.7%	122 days
2/22/1998 (3)	2	0.2%	1 day
7/21/1998	1	19.7%	41 days
12/11/1997	11	5.8%	32 days
6/12/1996	3	8.8%	34 days
10/09/1995	6	1.7%	1 day
9/19/1994	7	8.2%	65 days
1/25/1994	14	9.6%	69 days
11/03/1993	3	2.1%	2 days
12/02/1991	9	3.5%	7 days
6/27/1990	17	16.3%	91 days
11/01/1989	36	5.0%	91 days
10/11/1989	2	10.0%	5 days
9/14/1987	5	38.2%	36 days
7/14/1986	9	3.6%	21 days

(1) In September 2005, the Fed pumped $148 billion in liquidity from the first week in September, just before the Hindenburg Omens were generated — to the third week of October, an 11 percent annual rate of growth in M-3 (2.5 times the rate of GDP growth and 5 times the reported inflation rate), to stave off a crash. The liquidity held the market to a 2.2 percent decline from the initiation of the signal.

(2) In April 2004, the Fed pumped $155 billion in liquidity from the last week in April — right after the Hindenburg Omens were generated — to the third week of May, a 22 percent annual rate of growth in M-3, to stave off a crash. Even with the liquidity, the market still fell 5.0 percent.

(3) The 12/23/1998 signal barely qualified, as the McClellan Oscillator was barely negative at -9, and New Highs were nearly double New Lows. Had this weak signal not occurred, condition # 5 would not have been met. This skin-of-the-teeth confirmation may be why it failed. It says something for having multiple, strong confirming signals.

Another point to make here is that the actual stock market declines are often greater than the measures in the prior data chart. That’s because oftentimes the decline from a top has already occurred before the Hindenburg Omens have been generated. These percent declines are only measuring the declines from the first Omen in a cluster. If we measured declines from the tops, it would be worse in many cases. For example, the September 2005 signals came after the September 12th high of 10,701. The autumn decline of 2005 into October 13th, 2005 bottom ended up being 545 points (5 percent) even with all the liquidity pumping by the Fed.

Here’s something interesting: Oftentimes equities will rally after a Hindenburg Omen occurs, faking folks out, then the plunge comes on the other side of the hilltop. 1987 is a perfect example of that.

Another observation is that once you get two solid Hindenburg Omens in a cluster, the probability of a severe decline does not seem to increase as more Omens occur within the cluster. Sometimes a two signal cluster produced a worse decline than a 5, 11, or 17 signal cluster. But what can be said about multiple signal clusters is that the warnings are being given further out in time, keeping us on the alert. More signals also assure us a greater likelihood of better quality signals, which seems to matter. Multiple signals are telling us things are not getting better, that something continues to remain wrong with the market.

What does it mean for traders and investors when we get a confirmed Hindenburg Omen? This is really important to understand. A confirmed Hindenburg Omen is not a guarantee of a stock market crash. The odds of a crash based upon the history since 1985 is 28.5 percent. That means the odds we will not have a crash are quite high, at 71.5 percent. However, since a stock market crash is akin to economic death in many circles, you can look at the situation like this. If you were hearing from your doctor that the surgury you are contemplating stands a 30 percent chance of you dying, that becomes a very high percentage probability – one you likely do not want to take if the surgury is not absolutely necessary. A 30 percent probability of a stock market crash is extremely high when you consider that there have been only eight over the past twenty-five years, and the normal odds of a crash happening randomly are only about one-tenth of one percent. You now also have to factor that the Fed is pumping liquidity to prevent crashes once these signals occur. So you do not want to go short the farm. You may want to think about taking prudent precautionary action according to your investment advisor given the much higher than normal odds of a crash. That may not mean shorting. It may mean increasing cash positions or hitting the sidelines for a while. Or it may mean a carefully constructed shorting strategy developed with your advisor that limits losses, and invests only the amount which you can afford to lose. Still, it is interesting that even with the heavy liquidity the Fed has been pumping around the time of the past two signals, the odds of a 5 percent decline or more remain pretty high at 74.9 percent.

We do not think it is wise to listen to folks who minimize the risk in markets pointed out by the Hindenburg Omen. We disagree with the argument that since so many of the listings on the NYSE, especially those of the New High “stock” group recorded for the Omen, are some type of Fixed Income product (ETFs, preferred stocks, etc) that the Omen isn’t really capturing “stocks” when it says “we got x % New Stock Highs,” therefore the Omen is irrelevant. Our position is that the argument that the “stock market Omen” isn’t measuring the internals of the “stock” market is false. Here is why: A huge percent of NYSE stocks are financials, banking firms, and include firms such as General Electric which is essentially a financial firm, although many people would not think of them that way. Financial firms hold substantial positions in bonds. Almost every bank listed on the NYSE carries a fixed income bond portfolio somewhere between 15 and 30 percent of their entire balance sheet, and have for years, going back far beyond the past 25 years of our research, a period of time when the Hindenburg Omen worked just fine, thank you very much. Bond and other fixed income products are prevalent throughout the distribution of companies listed NYSE, and have been for years. This Omen has worked for at least the past 25 years. It accurately called the stock market crashes of 2007 and 2008 when the NYSE included many stocks holding significant positions in fixed income instruments. It does not matter. Our entire economy has essentially moved from a manufacturing base to a financial base. This makes the Hindenburg Omen relevant. We believe it would be unwise to ignore this potential stock market crash warning.

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