Fun with Charts: The Hindenburg Omen

Loyal readers are likely familiar with the 'Economics for Dummies (aka Lawyers)' series that Blawgconomics has sporadically kept up with. For everyone else, that series represents a perhaps futile attempt at getting a certain population of predominantly 'word people' to understand 'number people' stuff. While we don't anticipate that 'Fun with Charts' is destined for the same type of run, we thought that this week was a promising one for such a one-off, particularly as the fun in question goes far beyond your average death cross or moving average. That's right, the blogosphere and message boards were alight with week with chatter about the ominous-sounding Hindenburg Omen technical indicator.

Your author may be a few years removed from daily chart watching, but would define technical trading as a method of trading securities that is dependent on the analysis of pricing and volume patterns. This analysis leads to trading strategies based on whether the patterns in the charts signal the analyst/trader to buy, sell or hold, and contrasts with analysis based on company fundamentals. Indeed, technical analysis and trading is independent of analysis and trading based on a company's 'numbers' and it is probably not an oversimplification to say that these two groups of investors are often entirely at odds over a particular stock or even category of securities.

While many chart patterns are easy to identify and could be as simple as two lines crossing over each other in a moving average pattern, some are much more complex and may include several variables or prerequisites. The Hindenburg Omen (in addition to sounding like a future Dan Brown novel) is an example of the latter. Though the particulars are probably better left to the real experts, suffice to say that, in a nod to its namesake, the Hidenburg Omen portends a disaster for the markets.

Experts disagree over how effective the Omen actually is as a predictor of markets. However, at the very least, it could point to some choppy trading next week as highly derivative investors often trade based purely on what they think other investors will do. And those investors, are of course, trading based on their own expectations, which should rationally include their idea of what other investors are doing. Therefore, at some level, just the fact that the Hindenburg Omen was in the news is news in and of itself. And that, my friends, is Fun with Charts.

UPDATE: After the Omen reared its ugly head for a second time in as many weeks, the founder of the signal has exited the market completely.