October 31, 2010

As Hindenburg Omen Fades, the Golden Cross Rises

Jim Miekka, the Omen maker, is now bullish as signs point upward

In a time of year when everyone is preoccupied with ghosts, witches (oh, sorry, was that triple witching?) and, of course, vampires, there’s been some stir over the Hindenburg Omen. We previously wrote about the Omen, a technical indicator devised by stock watcher Jim Miekka, that was supposed to be a harbinger of a market crash. But the crash, predicted for late September, never occurred; in fact, stocks are humming along quite nicely with the Dow on the rise. Miekka himself has now adopted a bullish outlook even though when his Omen kicked in he sold all his holdings and took himself out of the market.

Not only has Miekka re-entered the market, now all the fuss seems to be over the Golden Cross, another technical indicator supposed to be a predictor of a market rise and discussed in a Forbes report. Earlier in the summer, the talk centered around the Death Cross—another Hindenburg-like sign of doom that occurred in July—but the Golden Cross has apparently trumped it soundly.

The Golden Cross, says Investopedia, is “a crossover involving a security's short-term moving average … breaking above its long-term moving average ... or resistance level.” The fact that a short-term moving average has topped the long-term moving averages says to some tech types that the market “has turned in favor of the stock.”

Why didn’t the market crash after the Death Cross or, more recently, the Hindenburg Omen, and what does that mean for the Golden Cross? There are a number of theories, one of which is that media hype is responsible for warding off catastrophe. All the attention paid to the two negative technical indicators can unnerve traders to a sufficient degree to compel them to sell their holdings in advance of any potential meltdown, or to hedge their investments so that they are protected from the downside. This has the effect of dispelling the pressure to dump losing positions before the negative symbol appears, thus negating its prediction.

The Golden Cross, on the other hand, is for all practical purposes being ignored, with Web searches for it running far behind those for the doom-and-gloom factors. This means, according to the Forbes theory cited above, that bad news is priced into the market and a lot of people are “standing on the sidelines.” A continued rally will cause them to finally relent and add their own money to the swelling market coffers, leading to a sustained rally that can fulfill the promise of the Golden Cross.

Will it come true? Only the gypsy knows for sure....

Read more about the Hindenburg Omen and other economic prognosticators at AdvisorOne.com.

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