I learned the hard way not to rely purely ontechnical analysis
to makeinvesting decisions.
In the early 1990s, I had built up a decent trading stake by
riding the momentum lifting high-techstocks of the era. Dave, my
best friend and the guy who first taught me how to trade, was a
die-hard technical analysis proponent who made a small fortune
correctly forecasting and buyingputs several days prior to the
1987market crash. He turned his college tuitionmoney into
enoughcapital to trade full time, buy a nice car and not have to
worry about working for someone else.
I'll never forget that phone call:
"Dave, the charts have set up just like they did in 1987!
It's time to short the market. Within the next week, there is
going to be a major crash! It's time toload the boat with
I naively followed his lead and bought as many puts on the
S&P 100Index (OEX ) as possible. We were both convinced that
these puts, bought for around $8 each, would soon be worth
After taking the plunge, we met at a local restaurant and
talked about all the things we were going to buy with the
winnings. I wanted a sports car like he had, and Dave planned on
buying a big house with hiscash .
I bet you know the end of this story.
The next day, thestock market took off on theupside ,
rendering our options completely worthless. Nearly all the
trading capital I built up over the past several years was gone.
My friend ended up moving back in with his parents,
Those hard-learned lessons -- that you should never bet the
majority of your capital on any one idea, and that technical
analysis is an inexact discipline -- spring to mind whenever I
hear a market guru making an extremelybullish orbearish
proclamation. If you have been paying attention to the financial
news, you have heard the latest bearish proclamation based on
theHindenburg Omen .
What Is The Hindenburg Omen?
With a name more suited for a horror movie than a serious
discussion about investing, the moniker is based on the 1937
explosion of the hydrogen-filled passenger airship.
Created in 1993 by mathematician Jim Miekka, this signal
usesmultiple technical indicators to predict sharp declines in
the market. Its primary data point is the number of New York
Stock Exchange stocks listed at 52-week highs and lows; each must
be greater than 2.8% of theNYSE 's totalvolume traded that day.
The theory is that high levels of both new highs and new lows
indicate topping markets andsector rotation .
Each signal is said to be valid for 30 days. The indicator has
correctly forecast each major market drop since 1987, including
the 2008 market rout.
The omen has been triggered twice since May 29. But
fortunately, it's accurate only about 25% of the time. While the
market has slipped since the omen was triggered May 29, theDow
Jones industrial average (DJIA) is down only about 1% so far
after bouncing from the 50-day simplemoving average .
Should I Be Concerned About The Hindenburg Omen?
I say the answer to this question is unequivocally no.
While the market may be topping out and could plunge at any
time, it's not because of the Hindenburg Omen. Remember,
technical analysis is only descriptive of what has happened -- it
is of questionable value in predicting whatwill happen.
Action to Take -->
This market is currently being driven by the Federal Reserve's
quantitative easing program (QE ), not esoteric prediction
techniques. All investors should be watching for signs and
signals fromthe Fed that it will start to begin cutting back on
its $85 billion in monthlybond purchases. This alone will be a
reliable signal that thebull run may soon be over.
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