Rather than focusing entirely on the occurrence of the Hindenburg Omen, traders should also take note of a number of other other indicators to forecast the stock market direction. This includes head-and-shoulder reversals that sometimes point to the same conclusion in a variety of markets. The Dow's recent dip below 10200, for example, is the beginning of confirmation of the full head and shoulder pattern.
A look other indicators also showed there were other factors at play which fueled the August 11 selloff. Traders, who have enjoyed Dow's rally from 10,100 to 10,600, would have used many protective stops based on the uptrend line or the support level at 10600, to trade the downtrend the followed. Trend-line stop-selling, in this case, helped accelerate the August 11 fall.
The markets are a chaotic system and constantly throw up relationships that appear to be correlated. A correlated relationship implies a degree of causality. That is, when event A happens it is followed by event B. The more events being measured, the greater the certainty of the conclusions.
Unfortunately, coincidence often mimics correlation. Event A happens, then event B, so the trader assumes a link between the two. Because traders often work with shorter time frames and less data points, the danger of confusing coincidence with correlation is great. Traders should suspect coincidence until correlation is proven beyond reasonable doubt.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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