The Hindenburg Omen has been officially confirmed by its second occurrence last Friday. Per Robert McHugh, www.technicalindicatorindex.com , there needs to be at least two occurrences within 30 days for it to be official. We had our first on August 12 and then the second on August 20. What this means is we have a higher than normal chance of a stock market crash starting to happen within the next four months. A stock market crash doesn’t always happen when you have a Hindenburg Omen but there hasn’t been crash without one for the last 25 years. This is just another wakeup call or warning for anyone who currently has long positions in the market. You need to protect those positions or close them out and wait on the side lines until we see better economic conditions.

Two weeks ago we had the possibility of a breakout to the upside (black arrow on chart below) but the market found strong resistance at the 10700 area (blue dotted line) and failed to break through. After the failure on August 9 (black arrow) it only took two days for the market to close below the 200 day SMA (solid red line) which is never a good sign. The market then sold off a little bit more and used 10300 and the 50 day SMA (solid blue line) as support. Unfortunately we lost about 400 points in market value for the week and we were being pushed toward bear market territory again.

We opened up last week with a doji and some hope that the market had ended its run down by finding continued support at 10300. On Tuesday we saw the market have a 100 point move to the upside and re-test the 200 day but there wasn’t enough buying strength behind it. On Wednesday we re-tested and failed to break through the 200 day again which lead to a very small gain that day. The next day the market sold off and was finally able to close below the 50 day SMA. The failure to stay above the 50 day tells us there is more potential for additional sell-offs and a stronger push toward a bear market. On Friday we finished off the week with another down day and we got our Hindenburg Omen confirmation.

Since the beginning of May, we have been range bound between 10700 and 10000. A decisive break above or below this range will determine who controls the short term market direction. My belief is that we will continue to move down and only continued government intervention or manipulation will hold off a steep decline. We saw the Fed try some quantitative easing but it didn’t have any positive effect on the market.

If the market can break through 10000, the next area of support will be at 9800 (purple dotted line). After that, 9600 (black dotted line) would be our last area of support. I believe a close below 9600 will put a lot of selling pressure on the market and it’s at this point that we could see a sharper decline. With August coming to a close, we cannot expect any help from investors in September because it’s normally a bearish month. The 20 day (solid gold line) is moving down again and the 50 is just about to turn over. If the 20 can move below the 200 and then the 50, it will signal stronger bearish activity. It’s not a question of if anymore, it’s a question of when and how far the market will drop. If McHugh is right, he expects a 20% decline from here.

To the upside, a close above the 50 day could bring the 200 day into play. Your areas of resistance are 10300 (50 day SMA) and 10450 (200 day SMA). A decisive close above 10450 with volume should allow the market fend off a bear market for a little while. It’s a nice thought but I don’t see that happening.

To protect your long positions, you should take a look at buying put options (QQQQ, SPY, DIA, etc.) or inverse ETFs (DOG, PSQ, RWM, SH, etc). Talk with your broker about which of these would best fit your investment strategy and protect your retirement accounts.

Click on image to enlarge!

On the weekly Dow chart below, you can see that the market found resistance at around 10700 (dotted green line). This is also the point where it found resistance in January and then again in May and June. When you see this many data points on a chart, this should be a target to take profits instead of increasing long positions. As the market fails to break through a resistance point, it becomes stronger with each additional failure.

During the week of 8/9 – 8/13, we first saw the market test the 10700 area and then a strong sell-off occurred. This brought us down through the 20 week SMA (solid gold line) and right on top of the 50 week (solid blue line). It’s as if the market hit a brick wall when it got to the 50. The market tried to use the 50 as an area of support but it was short lived.

Last week the market tried to push above the 20 week but it was repelled the last two days and we ended up a little bit lower for the week. The bad news is that the market closed below the 50 week which shows sellers were still in control. We have now been stuck in a range between 10700 (green dotted line) and 9700 (blue dotted line) since the beginning of May. We are right in the middle of the range at this point but I believe breaking the 9700 level is more realistic than a breakout above 10700.

The area around 10000 is our current market target and then the 9700 area. A decisive break below 9700 will push the market to new lows and then the route could be on. I certainly believe that the market could reach 8000 in the next four months given the average weekly range (open to close) since the beginning of May. The upside resistance areas will be the 50 week and then 10700 again. The 20 week is about 100 points above the 50 so that just increases the strength of the resistance below 10500. Everything is still pointing south and now the 20 week is just about to move below the 50. The last time this happened was February 2008 and it didn’t end until August 2009. Another 18 month downturn could be disastrous for the market and your retirement accounts.

Click on image to enlarge!

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