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An obscure technical market indicator with an ominous sounding name is again capturing the attention of markets. The 'Hindenburg Omen' is a technical indicator which is supposed to foretell the collapse of the American market. The last time it appeared in August 2010 it failed. The market did not collapse. Instead the Dow Jones Industrial Average rose from 10,200 to 12,700, or about 24 percent over the next nine months.
The 'Hindenburg Omen' reveals more about the behavior of market participants than it does about the market. The indicator is named after the Hindenburg airship which burst into flames in America on May 6, 1937. Just exactly how the name is related to market conditions it describes is a bit of a mystery.
The indicator is created by monitoring the number of stocks listed on the New York Stock Exchange that make new 52-week highs relative to the number of stocks making new 52-week lows. The omen is confirmed when both numbers are greater than 2.2 percent.
(Read More: The 'Hindenburg Omen': Bear Signal Scares Market)
It's always important to distinguish between something that may be statistically significant and something that is of significance for investors. There is always a danger of confusing co-incidence with correlation. And correlations do not always have any significance in terms of prediction.
The 'Hindenburg Omen' is index specific to the NYSE with seemingly exact requirements - 2.2 percent. Exactitude creates an illusion of reliability in a world of probability. This type of exactitude is often a result of statistical curve fitting and this signals caution. This is not a robust analysis tool. Specialist indicators only perform under very specific circumstances. Robust analysis tools provide reliable results under a variety of conditions and in a variety of markets.
Fast rises are inevitably followed by retracements. It's the nature of market behavior. It's the size of the retracement and its character that tells us if this is a buying opportunity, or a signal to exit and protect profits.
The retracement is a signal to protect profits when the market has developed end-of-trend behavior. This is often shown with chart patterns such as a rounding top, a head and shoulder pattern, or a significant drop below an established trend line.
None of these features have developed with the Nikkei.
The most important feature of the weekly silver chart is the way it moves in advance of the gold chart. The behavior in silver has led the behavior in gold for more than 18 months. Silver's fall below the critical long term support level near $26.50 an ounce gave early warning of the recent collapse in gold. (Note chart scale is shown in cents)
There are two key features on the silver chart. The first feature is the relationship in the Guppy Multiple Moving Averages indicator. They show a well established downtrend. The short term group of average reflects the behavior of traders. The wide separation shows traders are sellers. They are short on silver. The long term group of averages shows the behavior of investors. They are also sellers, as shown by the separation in the long term GMMA. The conclusion is that this is a downtrend that has a lower probability of developing a sustainable reversal.
(Read More: Silver Higher After Wild Ride)
So the important question to answer is to decide how low silver may fall. The answer is given by the long term historical support level near $19.40. This support level acted as resistance level in December 2009 and again in May 2010 and July 2010. The breakout above this level in September 2011 developed into a powerful new uptrend that reached the highs near $49.60 in April 2011.
The notion that the Australian dollar is a commodity currency took another bashing last week. The collapse of the Aussie below parity against the U.S. dollar in reaction to the surprise interest rate cut by Australia's central bank demonstrated the clear linkage between interest rates and the Aussie.
Is this a major change in the trend? Analysis of the weekly chart suggests this movement is within the limits of the broad trading range that has dominated the Aussie movement since April 2004. The Aussie peaked near $1.10, touching this level on several occasions in 2011. This created a resistance level that was never subsequently challenged again.
Setting the support level is a little more difficult. We locate support near $0.94. The reason for this is based on the symmetrical triangle pattern that developed in the second half of 2011. The pattern has a peak near $1.10 and a low near $0.94. This was the base of the symmetrical triangle pattern. It was also a resistance level in November 2009 and April 2010.
(Read More: Why Shorting the Aussie Is 'Trade of the Century')
The symmetrical triangle is a pattern of indecision. It shows that neither the bulls nor the bears can gain the upper hand. The weak breakout on the upside in January 2012 failed to reach resistance near $1.10.
The breakout heralded the beginning of a prolonged sideways trading pattern which oscillated around $1.02. In the second half of 2012 and the first part of 2013 the volatility of this oscillation declined with the Aussie moving between $1.02 and $1.06. This was a trendless and directionless market driven by stubbornly high interest rates in Australia. There is no reaction to the substantial decline in commodity prices during this period.
The surprise interest rate decision, along with the surprise employment figures conspired to push the Aussie below $1.02. The downside target is between $0.94 and $0.96. This movement is a renewal of the volatility within the broad trading band between $0.94 and $1.10. It is not necessarily the signal of a new downtrend in the Aussie. It remains a good shorting opportunity as it moves towards $0.96, but it does not have the characteristics of a long term downtrend.
Is the U.S. market poised for a correction? If it is then investors must decide if they want to protect profits before the correction develops. Traders and investors will also prepare to take advantage of any correction to enter the market again in anticipation of a continuation of the trend. Technical analysis identifies the probability of a correction and also helps to identify how large the correction may be.
The most important feature the on the Dow Jones Industrial Average chart is the parallel trading channel. The lower edge of the channel is the support trend line. This support line uses the low of June 2012 near 12,090 and the low of 12,515 in November 2012 as the anchor points.
The upper edge of the trading channel is created by the up sloping resistance line. The line uses the high near 13,233 in March 2012 and the highs near 13,655 in September 2012 and again near 14,020 in February 2013 as the anchor points for the position of the trend line. Between October 2011 and March 2013 the Dow remained inside the trading band. This included regular rally and retreat behavior.
(Read More: Buffett: Right Now, Stocks Are Good, Bonds Are Bad)
In March 2013 the Dow broke out above the upper edge of the trading band and continued to move higher. This breakout has a new upside target near 15,400. This target is calculated by taking the width of the trading band and projecting it upwards from the point where the breakout occurred. This calculation provides both an upside target and also a value for any correction or reaction away from the target level.
Copper is a key industrial commodity and its performance is often used as a guide to economic growth and development. The COMEX copper chart is suggesting a bearish economic outlook at a time when other economic indicators are suggesting a bullish outlook. Usually a rising DOW index which suggests economic growth is matched by a rising copper price. This is not happening in the current situation so investors are looking carefully at the strength of the divergence between the copper price and other market indices.
The weekly COMEX copper chart is dominated by a long term symmetrical triangle. This is generally a pattern of indecision. The bullish optimists in the market push prices higher, and this is shown by the rising trend line.
The bearish pessimists are sellers, pushing prices lower and this is shown by the down sloping trend line. These two trend lines suggest indecision in the market because there is no clear bullish or bearish pressure. The probability of an upside or downside breakout is around 50 percent.
(Read More: Commodity Bulls Struck by Fears of Global Growth)
The most important feature of the symmetrical triangle pattern is the way it is used to project upside or downside price targets. Once the breakout has started there is a high probability these targets will be achieved. There is a higher probability that downside targets are achieved because it is always easier for a market to fall than it is for the market to rise.
The base of the symmetrical triangle for copper developed in September 2011. It is $0.91 in height. The value is projected downwards from the point where the price moves below the lower trend line near 352 cents or $3.52 per pound. The downside target for copper using the symmetrical triangle pattern is near $2.61.
Is the pullback on the Nasdaq an entry opportunity for a continuation of the uptrend, or is it an exit signal because the trend is about to fail?
Answering the question is where chart and technical analysis is essential. It's useful to approach this from two different time perspectives. The monthly chart gives a good analysis of the secular, or dominant, underlying trend. The weekly chart helps to develop the trading tactics.
The breakout above 2900 in 2012 February was the first move to make new six year highs. The general Nasdaq uptrend continued for most of 2012.
(Read More: A Spring Swoon? Maybe, but Not Likely)
When the Nasdaq moved above 2900 in 2012, it broke above the strongest resistance level on the Nasdaq index. In October of 1999, the Nasdaq paused briefly near the 2900 level and then it moved rapidly upwards to the peak high of 5132. This 71 percent rise was later called the internet or tech bubble.
From the high of 5132, the Nasdaq collapsed to below 2990 and took another two years to reach the turning point low of 1329 in 2002 at the bottom of the downtrend.
The most important number for Comex gold is support near $1,540 an ounce and it has failed. This is the support level tested in October 2011 October and May 2012. It acted as a resistance level in June 2011.
This level has been a significant influence on the market so its failure as support is also significant. This is the lower level of a long term sideways trading band that has been in place since October 2011. This trading band developed after the peak high of gold near $,1924 in September 2011.
(Read More: Gold Hit by Panic Selling, Dragging Other Metals)
The upper edge of the trading band is the strong resistance level near $1,800. This resistance region was tested in November 2011, March 2012 and again in October 2012. The reality is that gold has been trapped in the sideways trading band since November 2011.
The trading band includes strong rallies and strong retreats. The break below $1,540 is a critical change in the trend. If the fall is further confirmed on a weekly chart with additional closes below $1,540 then it signals the beginning of a new bear trend in gold.
The trend change signal first started in May 2012 when the gold price moved below the long term up trend line.
The long term uptrend started in February 2010. Once the price moved below the long term uptrend line it rebounded from support near $1,540. The value of the long term uptrend line acted as a resistance level in October 2012. The value of the trend line was near to the upper edge of the trading band near $1,800.
The dollar-yen, which is trading at multi-year highs has spent several weeks consolidating near the 95 level. The breakout above 95 has an upside target near 102. Speaking on CNBC's "Asia Squawk Box" on December 21 as the dollar-yen moved above 84 we set the upside resistance target near 95.
In notes at the end of February we set the upside target near 102. The resistance behavior near 95 is significant because in the future this provides a floor for any market retreat. The rise of the yen is dragging the Nikkei index after it. Watching the dollar-yen gives early warning of Nikkei behavior.
(Read More: Yen's Safe-Haven Status Called Into Question)
This rapid rise from 79 to 95 had the short traders twitching their trigger fingers. They ended up shooting themselves in the foot. The rise was very rapid, but it was not unexpected from the technical chart perspective.
The dollar-yen breakout above 79 in October 2012 was part of a long term fan reversal pattern. This pattern started with the peak price of 110 in August 2008. We have spent five years with the yen well below parity, but this is not the usual condition for the yen. A return to parity or above is the long term position of the yen from 1996 to 2008.
Resistance near 95 is well established. It acted as a support level in March and August 2009. It acted as a resistance level in April 2010. This has been a major feature of the market post-Global Financial Crisis. Now that this has been broken this suggests it will become a strong support level in 2013. When it was acting as a resistance level it meant the dollar-yen took several weeks of consolidation near this resistance prior to developing a breakout.
On March 11 this year the S&P 500 index moved above 1,550. The index remained above 1,550 for most of March. This breakout is very important because it is a move above the long term double top pattern seen on a monthly chart of the index. The 1,550 resistance level is near the peak high of the S&P index in October 2007. It was also near the peak high in March 2000. This suggests 1,550 is a very significant resistance level.
Traders watch carefully for the development of any chart pattern which suggests a rapid retreat from 1,550. Rapid retreats happened in 2000 and 2007. There is a danger that the S&P index will temporarily move above 1,550 and then develop a retreat. However the weekly and the daily chart of the S&P Index do not show any trend reversal patterns. This is a bullish environment that suggests the S&P uptrend is strong.
(Read More: Will US Jobs Report Keep the Bulls Running?)
The uptrend behavior also does not include any chart patterns which help to set upside targets. Analysis of the long term pattern of support and resistance shows the S&P index moves in wide trading bands. Each of these bands is around 140 index points wide. The recent rally is a rebound rally from a support/resistance level at 1,410. The width of the trading bands provides the next upside target for this uptrend. It is near 1,550 and this is also the long term resistance level.