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'Hindenburg Omen' looms over S&P 500 as stocks stall

The Hindenburg burning.
Source: Wikipedia
The Hindenburg burning.

A technical analysis pattern for stock traders has pointed to an impending crash in stocks, adding to an increasing chorus of voices that have turned bearish on equities for the second half of the year.

The "Hindenburg Omen" - named after the Hindenburg disaster of 1937, in which the Zeppelin airship Hindenburg crashed and burned - is once again hovering over markets, according to Ron William, founder and principal market strategist at RW Market Advisory.

"The S&P 500 has hit an all-time high not so long ago, yet a lot of the stocks within the S&P 500 are actually making their yearly lows, suggesting some internal weakness in the stock market," he told CNBC Friday.

"[It's] maybe a good time to take profits within the market if indeed you see more downside risk coming up."

(Read More: 'Hindenburg Omen' hovering over Wall Street again)

William explained that the indicator, which should be used in conjunction with others, is a very practical indication of a classic distribution in a stock market and measures leadership rotation by filtering out stocks which are reaching their 52 week highs and lows. It predicted all the biggest declines in the last thirty years, he said, including both the correction in markets in 2011 and the 2008 financial crash, he said.

The S&P 500, which has rallied over 16 percent year-to-date despite taking a recent dip - is a stock market rising on sand, according to William. He said that the gains weren't broad-based, with all stocks failing to join in thus showing declining breadth.

(Read More: Rising interest rates will keep rocking stocks)

"The cyclical recovery is historically overstretched...so it doesn't take much for this market to, let's say, tip over," he said.

These bearish signals loom large over global stocks, which have stalled in recent days. Major indexes in the U.S. posted their biggest two-day losses since June on Thursday with Asian and European equities following suit on Friday. Global shares are headed for their biggest weekly fall in almost two months.

Investors are now looking ahead to the fourth quarter to see what could give equities upward momentum. The U.S. Federal Reserve's plans to reduce its $85 billion-a-month bond buying program will likely weigh on stocks in the third quarter.

Johan Jooste, chief market strategist at Merrill Lynch Wealth, said investors will start to look at company fundamentals, which have so far disappointed, for the next leg forward but dismissed the recent blip as a "normal bit of turbulence" in a slightly thin market.

(Read more: The 'Hindenburg Omen': Bear signal scares market)

"At some stage for this rally to make sense you have to have proper earnings, actual companies delivering actual earnings surprise to the upside," he told CNBC Friday. "It's a dangerous place to be if that's going to be a disappointed expectation, no doubt about it."

Neil Dwane, chief investment officer for Europe at Allianz Global said that U.S. banks were the only ones to show earnings growth because the extra liquidity provided by the central bank was feeding through to give them a strong capital position.

"I think the incremental sources of demand for the top line look more challenged than they have done for the last couple of years," he told CNBC Friday. "You look in the U.S., Walmart yesterday is basically telling you that the U.S. consumer is going nowhere."

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