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Hindenburg Omen Looks…… Ominous.

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by Gavin in Blog, Market Updates
May 10, 2017 0 comments

The Hindenburg Omen is something that was triggered last week and was getting a lot of air time on Twitter. Firstly, what is the Hindenburg Omen?

The Hindenburg Omen is a sell signal that occurs when NYSE new highs and new lows each exceed 2.8% of advances plus declines on the same day. In addition, the NYSE index must be above the value it had 50 trading days (ten weeks) ago. Once the signal has occurred, it is valid for 30 trading days. Any additional signals given during the 30-day period should be ignored.  During the 30 days, the signal is activated whenever the McClellan Oscillator (MCO) is negative, but deactivated whenever the MCO is positive.

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This signal generally occurs after a rising market when the number of new lows is rising rapidly, but when new highs are still quite numerous. The large number of highs and lows suggests that the market is indecisive and probably at a turning point.

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As you can see below, the signal was activated again last week. The previous two times we saw the signal turned out to be false readings. However, you can clearly see a couple of prior examples when it would pay to lighten up on bullish bets – 1987, 2000 and 2007. Maybe as we’ve had two false readings recently, we are due for the signal to be true this time?

The flip side of this, is the fact that stocks are breaking out from a massive multi-decade base. So while there is potential some cause for concern due to the Hindenburg Omen, in the long-term stocks could be on the cusp of a record bullish run.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Options Trading 101 - The Ultimate Beginners Guide To Options

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